The Trade Reducing Effects of Market Power in International Shipping
David L. Hummels
Purdue University - Department of Economics; National Bureau of Economic Research (NBER)
University of Memphis - Fogelman College of Business and Economics
Alexandre M. Skiba
University of Kansas - School of Business
NBER Working Paper No. w12914
Developing countries pay substantially higher transportation costs than developed nations, which leads to less trade and perhaps lower incomes. This paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs. In the presence of market power, shipping prices depend on the demand characteristics of goods being traded. We show theoretically and estimate empirically that shipping firms charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route. These characteristics explain more variation in shipping prices than do conventional proxies such as distance, and significantly contribute to the higher shipping prices facing the developing world. Markups increase shipping prices by at least 83 percent for the mean shipment in Latin American imports. Our findings are also important for evaluating the impact of tariff liberalization. Shipping firms decrease prices by 1-2 percent for every 1 percent reduction in tariffs.
Number of Pages in PDF File: 37
Date posted: February 23, 2007
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