Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture

We model demand for quality differentiated goods to derive a relationship between trade costs and the quality composition of trade. Detailed data on traded goods' prices, quantities and shipping costs for many importers and exporters are used to test these predictions. These data provide a strong rejection of the iceberg assumption on transportation costs and a strong confirmation of the classical Alchian Allen hypothesis. Within a narrowly defined commodity classification, exporters charge destination-varying prices that co-vary positively with shipping costs and negatively with tariffs. Shipping costs operate as a quantitative restriction similar to quotas.