Does the Internet Defy the Law of Gravity?

We show that gravity holds in the case of digital goods that are consumed over the Internet and have no trading costs. Therefore, trade costs, although possibly important, cannot account for the effects of distance on trade. In particular, we show that Americans are more likely to visit websites from countries that are physically close than from countries that are far, even after controlling for country-level Internet expertise, language, income, immigrant stock, and many other factors. Furthermore, we show that this effect only holds for digital products that depend on taste, such as music, games, and pornography. For these, a 1% increase in physical distance reduces the probability an American will visit the website by 3.25%. For less taste-dependent products, such as software, distance has no statistical effect.

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