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The Trade Reducing Effects of Market Power in International Shipping

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Author Info
David Hummels
Volodymyr Lugovskyy
Alexandre Skiba

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12914.

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Date of creation: Feb 2007
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Handle: RePEc:nbr:nberwo:12914

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Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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  1. Amador, João & Cabral, Sónia & Ramos Maria, José, 2007. "International Trade Patterns over the Last Four Decades: How does Portugal Compare with other Cohesion Countries?," MPRA Paper 5996, University Library of Munich, Germany. [Downloadable!]
  2. Miren Lafourcade & Jacques-François Thisse, 2008. "New economic geography: A guide to transport analysis," PSE Working Papers 2008-02, PSE (Ecole normale supérieure). [Downloadable!]
  3. Richard Pomfret & Patricia Sourd in, 2008. "Why Do Trade Costs Vary?," Working Papers 2008-08, University of Adelaide, School of Economics. [Downloadable!]
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