Spatial Price Discrimination in International Markets

Firms’ fob prices can vary depending on the distance to the destination market for two reasons: (i) firms can charge a different markup (ii) they can offer a product with slightly different quality. In theoretical models, distance generally covers transport costs. This paper shows that the response of firms’ prices to changes in distance to the destination market depends on the formulation of transport costs. Assuming additive or iceberg transport costs may imply opposite predictions concerning this relationship. Particularly, to have a positive relationship between prices and distance (because quality and/or markups increase) it is necessary to use additive transport costs. To discriminate among the two formulations, I try to measure the empirical impact of distance on prices.