THE INTERNET DOES SHRINK THE WORLD: Evidence from eBay of the ”death of distance” and its potential for boosting trade and incomes

Distance between countries impedes international trade, but it matters 65% less for trade on the eBay platform than for traditional offline trade. That is the central finding of research by Andreas Lendle, Marcelo Olarreaga, Simon Schropp and Pierre-Louis Vézina, published in the March 2016 issue of the Economic Journal.

Their study suggests that there are still momentous gains to be made from the online economy. Online platforms like eBay lower trade barriers as they enable people and firms to connect across oceans and cultures, potentially bringing about substantial further reductions in trade costs and thereby boosting trade and incomes. The authors'' estimates indicate that the average country''s real GDP per capita would go up by 4% if trade costs were generally reduced to the eBay level.

In the 1990s, many believed that with new communication technologies, geographical distance between countries would soon no longer encumber international transactions. Journalists famously predicted ''the death of distance'' or that ''the world is flat''. But a large number of academic studies have established that distance has been thriving rather than dying – that proximity to economic activity is as important as ever.

The new study argues that the right place to look for the death of distance is in online markets, which, in contrast with offline markets, make full use of those technologies that can effectively reduce ''information frictions'' between countries.

Thanks to access to eBay data, the authors build comparable baskets of goods traded on eBay and in total (mostly offline) trade statistics. They then compare the effects of distance on these two types of trade. As Figure 1 illustrates, the distance effect is 65% smaller on eBay than on total trade. The online world is flatter.

Traditionally, economists have attributed the effect of distance to shipping costs. But it seems unlikely that a reduction in shipping costs is driving online efficiencies, since eBay trade is typically single-item shipments to end-consumers, rather than bulk shipments that benefit from scale economies.

Instead, the authors hypothesise, the difference in the distance coefficients is due to a reduction in search costs. They find that it increases with product differentiation and is higher when trade partners speak different languages, when corruption in the exporting country is high and when uncertainty avoidance is high in the importing country.

In other words, online platforms lower barriers to trade. Merchants wishing to export do not need to acquire deep knowledge of their destination markets and establish business contacts and distribution networks. Instead, they can use online platforms to gain international visibility and build trust with remote customers. And while importers still incur some search costs, these are brought down to a simple mouse gesture.

In related research published in 2013, the authors analyse a dataset of US business sellers on eBay in 2010 to get a glimpse of what a more connected and frictionless world may entail for small businesses. They find that a remarkably high 85% of business sellers on eBay were engaged in cross-border sales in 2010. This is much higher than the offline number, which varies between 5% and 15%.

In his Weekly Address in February 2015, President Obama quoted from this research, noting that more businesses are using the internet to grow by reaching new customers whom they couldn''t reach before. As an example, nine of out ten American small businesses that use eBay as a platform to sell their products are exporters, with customers in more than 30 different countries on average.

''There Goes Gravity: eBay and the Death of Distance'' by Andreas Lendle, Marcelo Olarreaga, Simon Schropp and Pierre-Louis Vézina is published in the March 2016 issue of the Economic Journal.

The authors'' 2013 study, ''eBay''s anatomy'', was published in Economics Letters 121(1): 115-20.

Andreas Lendle is at the Office of the Chief Trade Adviser for Forum Island Countries. Marcelo Olarreaga is at the University of Geneva. Simon Schropp is at Sidley Austin LLP. Pierre-Louis Vézina is at King''s College London.