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The trade reducing effects of market power in international shipping

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  • Hummels, David
  • Lugovskyy, Volodymyr
  • Skiba, Alexandre

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 ocean cargo carriers 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. A simple back of the envelope calculation suggests that eliminating market power in shipping would boost trade volumes by 5.9% (for the US) to 15.2% (for Latin America). Our findings are also important for evaluating the impact of tariff liberalization. Cargo carriers decrease shipping prices by 1-2% for every 1% reduction in tariffs.

Suggested Citation

  • Hummels, David & Lugovskyy, Volodymyr & Skiba, Alexandre, 2009. "The trade reducing effects of market power in international shipping," Journal of Development Economics, Elsevier, vol. 89(1), pages 84-97, May.
  • Handle: RePEc:eee:deveco:v:89:y:2009:i:1:p:84-97
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    References listed on IDEAS

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    More about this item

    Keywords

    Transportation costs Price discrimination Liner conferences;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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