Price discrimination in the transport industry and the gains from trade

Shipping firms often charges nonlinear and discriminatory pricing for transportation. This paper shows that this nonlinear and discriminatory pricing in the shipping industry could hamper the welfare gains from trade due to within-industry allocation across heterogeneous firms. I extend a standard heterogeneous firm trade model with variable mark-ups by incorporating monopolistically competitive shipping firms that charge nonlinear and discriminatory pricing against manufacturers. In a standard setting, shipping firms optimally charge a higher transport price to the more productive firms, weakening within-industry reallocation toward productive firms. Elimination of this discriminatory practice could potentially increase the gains from trade.