Mind the Gap: Trade Costs and Markups in the Philippines

I investigate the effect of a transport program in the Philippines on spatial price gaps and markups of agricultural products. The Roll-on Roll-off Terminal System (RRTS) introduced in 2003 promotes the use of roll-on roll-off (RORO) ships for interisland trade. Using an origin-destination mapped dataset and the variation in the availability and timing of RORO services between provinces, I find that conditional on distance, price gaps as proportion of farmgate prices are on average 28% smaller in province pairs that have RRTS connection. The gap narrowing effect is driven by higher farm prices without the corresponding increase in retail markets. During episodes of localized weather shocks, farmers in RRTS provinces retain a higher share of the rents from price increases, while changes in consumer prices are not significantly different than in non-RRTS provinces. The results are consistent with a reduction in markups from RRTS-induced competition in intermediation and shipping services.