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 large are the costs that separate households in developing countries from the global economy? Guided by a flexible model of oligopolistic intermediation with variable mark-ups, our analysis proceeds in four steps. first, we measure total intranational trade costs (ie marginal costs of trading plus mark-ups on trading) using price gaps over space within countries—but we do so only among pairs of locations that are actually trading a good by drawing on unique data on the location of production of each good. Second, we estimate, separately by location and commodity, the passthrough rate between the price at the location of production and the prices paid by inland consumers of the good. Our estimates imply that incomplete pass-through—and therefore, intermediaries’ market power—is a commonplace, and that pass-through is especially low in remote locations. Third, we argue that our estimates of total trade costs (Step 1) and pass-through rates (Step 2) are sufficient to infer the primitive effect of distance on the marginal costs of trading; after correcting for the fact that mark-ups vary systematically across space we find that marginal costs are affected by distance more strongly than typically estimated. finally, we show that, in our model, the estimated pass-through rate (Step 2) is a sufficient statistic to identify the shares of social surplus (ie the gains from trade) accruing to inland consumers, oligopolistic intermediaries, and deadweight loss; applying this result we find that intermediaries in remote locations capture a considerable share of the surplus created by intranational trade.
You can listen to a podcast of Donaldson presenting a much earlier version of this work from the International Growth Centre. He does a really nice job of summarizing the issues involved in inferring trade costs from price data.