Bias in estimating border- and distance-related trade costs: Insights from an oligopoly model

Regressions of price differences between locations in different countries without controlling for the local market structure and the location of origin will lead to a biased estimate of the impact of national boundaries. We demonstrate that non-classical measurement error in distance and unaccounted...

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Bibliographic Details
Published in:Economics letters 2015-01, Vol.126, p.147-149
Main Authors: Coşar, A. Kerem, Grieco, Paul L.E., Tintelnot, Felix
Format: Article
Language:English
Subjects:
Arbitrage
Bias
Border effect
Borders
Boundaries
Economic theory
Estimation
Estimation bias
Location analysis
Market structure
Measurement errors
Oligopoly
Price differentiation
Regression analysis
Studies
Trade costs
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Summary:Regressions of price differences between locations in different countries without controlling for the local market structure and the location of origin will lead to a biased estimate of the impact of national boundaries. We demonstrate that non-classical measurement error in distance and unaccounted mark-up differences across countries are responsible for these biases. In a quantitative exercise based on our previous work (Coşar et al., 2014), we show that the estimated border effect with price difference regressions overstates the true border effect by a factor of two or more. •Cross-price difference regressions are widely used to infer the cost of national boundaries.•We show that these estimates suffer from two problems.•First, there is non-classical measurement error in distance.•Second, there is an omitted variable bias due to unaccounted mark-up differences.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2014.11.034