Location-based pay means the company pays more for areas where the supply is priced higher. It's not about cost of living, because the company won't pay me more if I prefer a Ferrari over a Fiat.

Location-based pay pays people more if they're in a market where they have other options, so they don't go to those other options.

In essence, if you have location-based pay, you're incentivizing your employees to move to an area where they'll have vastly more employment options than to stay with you.