This paper uses a newly collected dataset on the prices of narrowly defined goods across many dispersed locations within multiple developing countries to address the question, How integrated with the global economy are households in developing countries? In order to estimate trade costs we utilize price gaps over space—but we do so across trading locations only by drawing on unique data on the location of production of each good. These trade costs contain two elements: intermediaries’ marginal costs (due, for example, to poor infrastructure) and intermediaries’ mark-ups (due, potentially, to their market power). We estimate, separately by location and commodity, the pass-through rate between the port price of each imported good and the prices paid by inland consumers of the good; in doing so we exploit variation induced by exchange rate shocks. Our estimates imply incomplete pass-through, which is evidence for intermediaries’ market power. We show that the estimates of total trade costs and pass-through rates are sufficient to infer the primitive relationship between marginal transportation costs and distance (which is ordinarily obscured by the way in which mark-ups vary over distance), as well as the distribution of surplus (here, the gains from trade) among inland consumers and intermediaries.
Atkin, D.; Donaldson, D. Who’s getting globalized? Intra-national Trade Costs and World Price Pass-through in South Asia and Sub-Saharan Africa (IGC Working Paper). International Growth Centre (IGC), UK (2012) 36 pp.