Market structure analysis: crude oil tanker shipping versus container liner shipping

Market structure analysis: crude oil tanker shipping versus container liner shipping

Introduction

The market structure is the competitive landscape of a market as characterised by the number of buyers, number of sellers, level of control on information, uniqueness of services, government interference and ease of entry and exit (Tiecke, 2011). The main types of market structures are perfect competition, monopoly, oligopoly and monopolistic competition. The extreme ends in these types of market structure are perfect competition and monopoly. Perfect competition is characterised by numerous sellers and buyers and market forces of demand and supply are solely responsible for determining the price of commodities (Cowling and Waterson, 2003). However, in monopolies, the supplier is able to wield immense power in determining price. These and other elements of market structure have been used in this paper in comparing the market structures for crude oil tanker shipping and container liner shipping sectors.

Crude oil tanker shipping

Crude oil tankers transport unrefined oil from extraction points to refinery points. They are ideal for bulk transportation for liquid cargo. The market structure applicable to this sector is perfect competition (Lun, et al., 2013). In perfect competition, the market players wield no power to influence pricing and the forces of supply and demand play an important role. Provision of identical products and services reduces competitive edge for individual industry players hence further reducing their influence on pricing. The other characteristic of perfect competition structures is the availability of information (Mackenrodt, Gallego and Enchelmaier, 2008). Information is readily available in perfect competition as opposed to restricted access to information in monopolies and oligopolies. The entry and exit barriers should also be relatively low. An analysis of the tanker market done below confirms that it is a perfect competition.

The ship owners that use tankers provide identical services when they take crude oil and deliver it to refinery points. The carriers are the sellers while the shippers are the buyers. The two groups collectively determine price and capacity. Since the 1990s, demand for shipping services have more than doubled hence significantly increasing the prices of shipment (Lun et al, 2013). The information about prices that are charged for freight services is readily available. The customers can directly contact the shippers and make their budgetary provisions with certainty. This reduces the role of brokers and other intermediaries and customers are therefore able to evaluate the competitiveness of the offers made without inhibition. The cost of acquiring a ship is very high. However, it is not difficult as there is a vibrant market for ship building and resale of second hand ships. Besides, the cost of exit is lowered by the ease of disposal of the ships (Yeongsok, Keunjon and Jungsoo, 2012). These characteristics affirm the fact that this sector can be categorised as a perfect competition.

The entry and exit barriers are directly related to the existence of other related markets within the industry. There are four markets in the industry which can be categorised into real and auxiliary markets. Real markets directly impact the existence of the industry and it includes new ship building and the scrapping market (Hennig et al., 2011). The new ship building market has the ship builders as the sellers with industry players as the buyers. The scrapping market on the other hand is concerned with the disposal of used ships. It lowers the cost of exit as well as providing an avenue through which carriers can responsibly dispose of old ships. The auxiliary markets on the other hand include second-hand markets where the current industry players sell their used ships in order to invest in purchasing new ones.

The status of the sector as a perfect competition is however under threat. The prospect of major oil companies taking control of the distribution process while there has been a trend to consolidate shipping services (Global Overview: India Bulk Shipping, 2012). The predicted emergence of giant industry players that can control significant market shares could threaten the existence of perfect competition in the sector.

Liner shipping industry

The liner shipping industry is part of the ocean shipping sector that specialises in providing scheduled cargo transport services and the ships operate on specified fixed routes (Gao and Yoshida, 2013). There are numerous players in this industry. However, the largest four players control over 40% of the market. This means that the largest players can collude to influence freight charges quite effectively. The schedule for the market shares is as contained in the figures shown below:

The liner shipping industry can be categorised under the oligopoly market structure. Under this kind of market structure, a few players in the market have a very high market share. They are therefore able to work together to impose prices on the market. Focus of players in markets with such a market structure is on consolidation and formation of strategic alliances in order to increase their market share in the market (Sys, 2009; Yeong-seok, 2013). The consolidation also gives them an advantage in controlling the distribution and marketing competencies. As competition intensifies, the dominant market players engage in acquisition of other smaller players in order to boost their market share.

The buyers in oligopolistic markets tend to have low bargaining power with the dominant sellers exerting their influence. The buyers are shippers who need their goods shipped to various locations. These are often numerous and small scale (Kjeldsen, 2009). There are also a significant number of large exporters such as large corporations. These tend to use their ability to transact in large volumes to bargain for more favourable prices while also binding the liner shipping industry players into long term contracts.

The other element of oligopolistic market is reduced threat of entry. While the barriers to entry may not be imposed by law as is the case with monopolies, the presence of large industry players increases this threat (Grama, 2012). Such dominant players tend to have large market shares which they actively shield through marketing and other business strategies. There is also the question of cost. New entrants need a huge capital outlay that may be difficult to afford. Besides, there may also be issues with acquiring expert employees who are capable of running an organisation in the industry. The larger players are on the other hand keen to actualise in cost leadership and this makes it difficult for entrants to survive in view of the fact that they may need to price highly to recoup their initial investments.

Oligopolies can be further categorised into 2: symmetric and asymmetric. Symmetric oligopolies are characterised by dominant market players having an almost identical market share while asymmetric ones are characterised by one player being dominant (Tiecke, 2011). This market is symmetric. Oligopolies can also be characterised by the nature of collusion that is common among the members. Collusion can either be formal or informal. Formal collusions take place through conferences convened at the industry level where standard charges and operational practices are agreed upon (Tiecke, 2011). This is quite among the industry players (Shintani, Konings and Imai, 2012). Tacit collusion on the other hand includes agreements geared at making operations more efficient. These are also quite common and are often at the centre stage of moves to drive consolidation within the industry.

Summary and conclusion

The crude oil tanker shipping and the container liner shipping are different in view of the fact that they can be categorised under perfect competition and oligopoly respectively. The categorisation of these market structures can be summarised in the table below alongside the main elements that characterise market structures.

Crude Oil Tanker Shipping Versus Container Liner Shipping
Factors	Crude Oil Tanker Shipping	Container Liner Shipping
Overall market structure	- Perfect competition	- Oligopoly
Dominance of main players	- Main players do not have a controlling share of the market	- The first five players control over 40% of the market
Information control	- Information is freely accessible - Main shippers can easily contact carriers without intermediaries	- Due to diversity of rules and procedures for different cargo, information is not easily mastered by customers - Logistics companies play an important role in linking the customers to the carriers
Buyer power	- Customers are many with little power to impose prices. They however have moderate power due to the presence of large shippers who could take control of their distribution functions	- Customers are numerous. They are likewise not in a position to impose prices. However, they are sensitive to price and service quality and can shift shippers from time to time
Threat of entry and exit	- Ease of entry is high. Even though capital outlay required is high, the market is fragmented and customers can easily be captured	- Ease of entry is low.  The capital outlay is high. Dominant players erect barriers that are difficult to overcome.

From the presentation above, the crude oil tanker shipping is a perfect competition while the container liner shipping is an oligopoly. Future trends are likely to see crude oil tanker shipping lose its perfect monopoly status as players begin to seek consolidation. The container liner shipping is on the other hand likely to become an even tighter oligopoly.

References

Cowling, K., Waterson, M., 2003. Competition, Monopoly, and Corporate Governance: Essays in Honour of Keith Cowling. Edward Elgar Publishing

Gao, Z., Yoshida, S., 2013. Analysis on Industrial Structure and Competitive Strategies in Liner Shipping Industry. Journal of Management and Strategy 4(4), pp. 12-21

Global Overview: India Bulk Shipping. 2012. Global Overview: India Bulk Shipping. India Shipping Report Q2 4(2), PP. 50-61

Grama, I.G., 2012. The Influence of the Global Economic Crisis on The Evolution Of Liner Shipping Market. Economics, Management and Financial Markets 7(4), pp. 632-641

Hennig, F., et al., 2011. Crude Oil Tanker Routing and Scheduling. INFOR, suppl. Special Issue in "Maritime Transportation" 49(2), pp. 153-170

Lun, Y.H.V et al., 2013. Oil Transport Management, Shipping and Transport Logistics, London: Springer-Verlag

Mackenrodt, M., Gallego, B.C., Enchelmaier, S., 2008. Abuse of Dominant Position: New Interpretation, New Enforcement Mechanisms: New Interpretation, New Enforcement Mechanisms? Springer

Shintani, K., Konings, R., Imai, A., 2012. The effect of foldable containers on the costs of container fleet management in liner shipping networks. Maritime Economics & Logistics 14(4), pp. 455-479

Sys, C., 2009. Is thecontainerlinershippingindustryanoligopoly? TransportPolicy 16, pp. 259–270

Tiecke, K., 2011. Mergers and (uncertain) Synergies in Oligopoly. GRIN Verlag

Yeong-seok, H., 2013. An Analysis of Market Concentration in the Korean Liner Shipping Industry. The Asian Journal of Shipping and Logistics, 29(2), pp. 249-266

Yeongsok ,H., Keunjon, C., Jungsoo, S., 2012. Estimation on Oil Tanker Fleet Capacity in Korea's Crude Oil Market, The Asian Journal of Shipping and Logistics 28(1), pp. 1-8