Transport Cost and Quality in International Trade: Exporting the Bad Apples

• Agricultural Economics Workshop

Date and Location

Tuesday, April 8, 2014, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

Transport costs have received surprisingly little attention in the international trade literature. We demonstrate that significant transport costs for a relatively high quality product represents a natural trade barrier, protecting home-country production of the higher quality product and constraining the foreign exporter to shipping a lower quality substitute. Surprisingly, through product differentiation in an oligopolistic market, the foreign firm may gain when the home producer exploits the transport cost advantage. With differential transport costs between a higher and a lower quality product, firms in both countries may gain by implicitly coordinating in an increasingly segmented market and choosing a high-price strategy for both products. The international orange juice market, with lower quality frozen-concentrated juice and higher quality not-from-concentrate juice, provides compelling evidence supporting this model.