Oligopoly and Liner Shipping Economics

What is meant by liner service?

•       Regular scheduled service – at least every two weeks – the vessel will sail on time whether full or not (unlike bulk carriers or tankers)

•       Known ports of load and discharge

•       Usually – multiple ships operating on the route – therefore reliability of service

•       Fast service – usually higher speed than tankers or bulk carriers (example: typically 17-18kt v 13.5kt. But “Emma Maersk”: 25.5kt, 18,000 TEU, 13 crew and 250tpd)

•       The cargo itself can be tracked the whole time

•       The cargo may well be part of a land/sea/land service

Liner Shipping and Oligopolies

•       The large size of many liner shipping companies has led to them being viewed as firms in an oligopolistic market

–      Six firm concentration ratio (CR₆) currently (see next slide) is 49%, or a “loose oligopoly”

•       A liner service is not just about container lines

•       Other ship types: Ro-Ro, General Cargo and Passenger ships (where the original meaning was derived from) can also be described as offering a “Liner Service”

•       The key requirement is the regular, repetitive scheduled service

Just 6 companies control half of fleet

 Implications for Market Power

•       Firms seek to join into cartels, conferences or “Alliances” to increase market power

•       If this leads to uniform high prices there is a loss of competition in the service offered to customers – the alliances argue that because they exist prices to the customer are lower

•       Profits can be maximised by price discrimination which is  not necessarily good for the customer

•       In liner services it is the tradition that high value/small volume goods are charged higher freight whereas:

•       Low value/high volume goods are charged lower freight (c.f. Economies of Scale)

Concentration in Liner Shipping

•       The Conference system is in the process of dying a natural death, aided by legal challenges in the USA, Australia and the EU

•       Demand for shipping services is now more inelastic, there is less price discrimination and the social costs of cartels are higher – the argument is that if they did not exist no single company could sustain the unprofitable service 

•       In the 1990s liner companies began to form global alliances but these have proved unstable

•       Then shipping lines merged to form mega-carriers e.g., Maersk acquiring “P&O Nedlloyd” in 2005

•       Maersk has now formed the P3 alliance with MSC and CMA-CGM

•       G6 (APL, Hapag-Lloyd, Hyundai Merchant Marine, K Line, MOL and Orient Overseas Container Line), Green or CKYH (Coscon, Hanjin, K Line and Yang Ming) alliances already operating

How to use Market Power

 Liner Pricing – 1

•       Liner shipping has very high fixed costs in the short-run (just think of the higher fuel cost and principle of sailing even when not full)

•       This is the cost of providing the ship at the berth for that sailing – berth has to be booked under long-term arrangement

•       It is important to spread the fixed cost over as much capacity as possible

•       Liner ships need to be full or nearly full for short run profit maximisation

Liner Pricing -2

•       Ships handle better when physically full

•       By accepting low value cargoes this denies them (the cargoes) to competing companies

•       Shippers generally have poor knowledge of prices charged for other goods

•       There is little transparency about pricing with the shipping companies keeping this information highly confidential

Cost curves for liner shipping

Liner Conference Pricing

•       Liner conferences are (legal) cartels but different regimes: USA, China and EU each have differing regulatory approaches

•       They have market power

•       If prices are set too high, new entrants will seek supernormal profits

•       If prices are set too low, the shareholders will withdraw their capital

•       Liner conferences will seek maximum revenue in the long-run

Container Pricing

•       The system of price discrimination outlined above evolved before containerisation

•       It continues in many cases today

–      Commodity box rate (CBR) means paying one rate for the container according to the commodity carried (implies just one commodity inside container)

•       Shippers claim that as handling costs are the same for all cargoes, all containers should pay a single rate

–      Freight all kinds (FAK) – means grouping types of packages as one rate rather than by individual commodity

•       To keep shippers loyal and prevent undercutting by non-conference lines, shippers are offered deferred rebates or exclusive contracts

–      If the shipper stays loyal for e.g., six months, money back is offered on the tariffs already paid

–      Under the exclusive contract system the lower rate applies immediately