DP12910-3 | Fading Choice: Transport Costs and Variety in Consumer Goods

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We examine the spatial variation in variety of manufactured goods to study how choice fades with distance. We model monopolistically-competitive trade between market town and village and show how transport costs reduce consumer welfare through reduced variety. We use data from a purpose-designed survey of shops and consumers in villages in Ethiopia and prices of matched source and destination goods to estimate similar tastes for variety across space. Our estimates suggest an average mark-up of 10-15% and welfare costs of falling variety at 19% on average of expenditures on manufactures, in contrast to the effect of prices at an average of 1.75%. The cost of lower variety in remote places is substantial.