Do Transport Costs Change Organizational Form under Two-way Trade Market?

Do Transport Costs Change Organizational Form under Two-way Trade Market?

Focusing on the asymmetric freight rates associated with backhaul problem, we analyze firms’ choice of organizational form between the unitary form (U-form) and the multidivisional form (M-form). With exogenous freight rates, choosing M-form is the dominant strategy even though collective choice of the U-form benefits both firms (prisoners’ dilemma situation). Allowing for endogenous freight rates results in asymmetric freight rates between port pairs due to trade imbalances. In this case, unlike previous studies, diverse types of organization form, i.e., both firms U-form, both firms M-form, and only one firm U-form, arise depending on the product substitutability and marginal cost of transport firm. In any case, the U-form is preferred to the M-form from the welfare perspective in the symmetric organizational forms between firms.