Nonlinear Pricing in the Transport Industry and the Gains from Trade

Recent empirical researches documented that there exists nonlinear pricing phenomenon in the shipping industry. This paper strives to show how this empirical regularity would alter conventional results in trade literature. This paper shows that when nonlinear pricing in shipping industry is considered, while the average productivity is higher conducive to higher welfare level, the gains from trade is generally lower than the situation without. In addition, the model built in this paper offers micro foundations for additive trade cost and features endogenous response of shipping charges to iceberg trade cost, an empirical finding emphasized in Hummels et al. (2009). In a much broader sense, this paper argues that heterogeneous firm model offers a lens through which traditional results on some interesting objects, e.g. gains from trade, could be altered.