Can Digital Distribution Defy the Law of Gravity?

Online delivery of digital media content is expected to nullify geographical friction. However, we provide evidence that physical distances still matter for sales on digital distribution platforms. Using data from country-level game sales collected from Steam, the world’s largest computer game distribution platform, we show that consumers are less likely to buy games developed in distant countries. The effect is driven by changes in quantity, not by changes in price. Further analysis shows that information friction partially explains the tendency. By developing a model, we quantify the significance of this effect on gains from free trade