Abstract
Farm prices are dispersed across locations within a country more than twice compared to retail prices at the individual good level. This paper shows that this observation, which is against the classical dichotomy, can be explained by a trade model featuring variable retail markups where retailers search for the minimum farm price across locations (subject to transportation costs) to combine them with other local inputs. Local input costs are shown to contribute the most to dispersion of retail prices across locations, on average across goods, followed by variable retail markups; the contribution of traded-input prices are relatively small. One third of the consumer welfare dispersion across locations is shown to be accounted for by retail margins which also explain more than half of the consumer welfare dispersion across products.
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