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The Trade Reducing Effects of Market Power in International Shipping

37 Pages Posted: 23 Feb 2007  

David L. Hummels

Purdue University - Department of Economics; National Bureau of Economic Research (NBER)

Volodymyr Lugovskyy

University of Memphis - Fogelman College of Business and Economics

Alexandre M. Skiba

University of Kansas - School of Business

Date Written: February 2007

Abstract

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.

Suggested Citation

Hummels, David L. and Lugovskyy, Volodymyr and Skiba, Alexandre M., The Trade Reducing Effects of Market Power in International Shipping (February 2007). NBER Working Paper No. w12914. Available at SSRN: https://ssrn.com/abstract=964877

David L. Hummels (Contact Author)

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Volodymyr Lugovskyy

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Alexandre (Sasha) Mykolajovych Skiba

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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