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A Model of Trade with Endogenous Transportation Costs

Author

Listed:
  • Scott Petty

    (University of Minnesota)

  • Jose Asturias

    (University of Minnesota)

Abstract

Fragmented connectivity is a reality of the transportation industry. Two ports need not be connected by a shipping line--in fact, the vast majority of ports in the world are not connected by a line. If this is the case, then any shipment must be off-loaded through at least one additional port adding expenses to the trip. In this paper, we examine the effect connectivity has on trade. We build a model of the transportation industry within a standard Melitz framework. To enter the transportation industry, firms must pay a fixed cost. Transportation firms also enjoy increasing returns to scale. Because of the fixed cost, small markets are less likely to be connected by a shipping line to another country. In addition, small markets that are connected will pay more because of market power of transportation firms and the inability to take advantage of economies of scale. In this model, trade volumes and transportation prices are jointly determined. The data set that we assembled on the route structure of the transportation industry and freight prices suggests that connectivity can significantly affect both the freight price and trade volume. We propose an estimation strategy using the data that we collected for the parameters of the transportation industry.

Suggested Citation

  • Scott Petty & Jose Asturias, 2012. "A Model of Trade with Endogenous Transportation Costs," 2012 Meeting Papers 1095, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:1095
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    References listed on IDEAS

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    Cited by:

    1. Marco Fugazza & Jan Hoffmann, 2017. "Liner shipping connectivity as determinant of trade," Journal of Shipping and Trade, Springer, vol. 2(1), pages 1-18, December.
    2. Jan Hoffmann & Naima Saeed & Sigbjørn Sødal, 2020. "Liner shipping bilateral connectivity and its impact on South Africa’s bilateral trade flows," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 22(3), pages 473-499, September.
    3. Xiaoming Guo & Jinyu Li & Sen Huang, 2023. "Study on Trade Effects of Green Maritime Transport Efficiency: An Empirical Test for China Based on Trade Decision Model," Sustainability, MDPI, vol. 15(16), pages 1-30, August.
    4. Jan Hoffmann & Naima Saeed & Sigbjørn Sødal, 0. "Liner shipping bilateral connectivity and its impact on South Africa’s bilateral trade flows," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 0, pages 1-27.

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