Importance Of Oligopolistic Characteristics

This paper focuses on the importance of oligopolistic characteristics in the global container shipping industry. It is difficult to examine this market although containerization has standardized the shipping industry. My approach to meet this controversial issue is to divide between three levels: the industry, alliances and the trade level. In my investigation I also use a graphic explanation, the concentration level of the industry, the cobweb model and the kinked demand curve. The results allow us to determine how influential is the concentration level, the competition and alliances in the container shipping industry.

Michail Archontakis (377602)

Economics

7 December 2012

INTRODUCTION

The global container shipping industry can be characterized as an oligopoly. Moreover, we can say there are few sellers and the provided services or products are quite similar. It is necessary to examine the market structure in three main levels: the industry, the alliances that exist and the trade level. The market is characterized by globalization. As a result, there is a need to satisfy customers’ demands and invest in resources as well as in the development of the new technology. So we can see the growth of the world economy and the world trade. Shipping companies have two choices, form an alliance or the other one is mergers and acquisitions. I will also use a graphic explanation to describe the way and how the industry has developed over the past years. Lastly, the purpose of this assignment is to introduce the importance of the oligopolistic characteristics in the global container shipping industry.

THE INDUSTRY

The market has mainly consisted by containers and containerization has developed it in a more standardized approach. In the global container shipping industry, we could meet collusions which are called as “shipping conferences”. We all know that their main interest is to fix freight rates in certain routes and form barriers, in the entry of new firms. Pricing in the industry means “under the table” agreements between shippers and carriers. By this way, they can achieve economies of scale which can lead to a small number of firms (Marlow and Nair, 2008). As stated by Haralambides in 2000 two factors are crucial in the understanding of conference freight rates: unit values and stowage factors.

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After the abolition of the anti-monopoly privilege of freight conferences (18 October 2008, Regulation 4056/86), and due to the trend of growing consolidation. The market is developing into a more collusive market, where operational agreements becoming more and more vital.

The market has become more concentrated, and the smaller operators conduct a market share of less than 1% per each. As we can observe from table 1 above top 10 carriers, have a market share of 63.5% (www.alphaliner.com). The market share of the top ten carriers was 49.3% in 2000 (www.alphaliner.com). There is a tremendous increase in market share as well as in total TEUs. Moreover, few firms fit most of the market power and probably can determine in a high level the industry and the chief shipping routes. They can create entry barriers and also make agreements on the freight rates. It is especially valuable for firms to cooperate and some state acting like monopolists. As a result, each firm must be aware of the other players’ actions.

World Ranking of Maritime Shippers, by Shipping Capacity Source: Alphaliner

This oligopolistic characteristic makes the industry more complex and needs to cover many factors. Moreover, to deal with customers’ international requirements, the development of ever larger container ships, upgrades in technology, increasing competition and high consolidation. Leading to globalization where few firms dominate the leading trade routes and to the event of multi-trade strategic alliances.

This change is also notable for the customers. Furthermore, they can now have more requirements and benefits. Nowadays, they can request faster shipping, more frequent services and lower costs as well as to know at any time the exact location and condition of their cargo.

Container shipping companies have become more unified with new technologies and also have improved the contribution significantly quality. We now have larger vessels, and they can benefit from economies of scale. Surely, the oligopolistic environment has raise competition and has expanded world economy as well as world trades.

ALLIANCES

Shipping companies have two choices form a strategic alliance and the other one are the acquisitions and mergers. In order to reach economies of scale, scope and network alliances have developed in two ways. Moreover, there are core alliances with international partners and the other one is multi-consortia networks of slot. This is a general connection in oligopolistic markets and of considerable importance. An alliance helps to gain greater market shares and contain more effectively the trade routes as well as, the capacity.

There are five key ideas in the movement of alliances in the global container shipping industry. Furthermore, it can do more effective wider geographically routes. Secondly, they can create their ships in a more global scope. The risk is less because it is shareable now. They can provide more repeated services to their customers, meaning more frequent schedules. Lastly, economies of scale become more apparent, and there is also an increase in the size of the ships (Sato, 2002).

It is noteworthy to analyze the three of the most powerful alliances over the past years. Furthermore, these three alliances started with an agreement on collaboration for east-west trades and then extended to north-south services.

The first alliance we will examine is New World Alliance. It includes mainly APL, MOL and HMM. Its overall capacity in TEUs is 1.161.468 and owns 282 vessels (alphaliner.com). Imagine that in 2000 the capacity of this alliance was 325.487 and the number of vessels 90 (Midoro and Pitto,2000). As we can see, it right increased its market share, and this is highly influential in oligopolistic markets because it can alter the market as well as conduct more properly the capacity.

Another notable alliance is the Grand Alliance. In February 2006, after P&O exodus the new Grand Alliance formed by Hapag-Lloyd, OOCL, and NYK Line. Its overall capacity in TEUs is 1.187.607 and owns 288 vessels (alphaliner.com). In 1996, it owned only 255.705 TEUs and 72 vessels (Midoro and Pitto,2000). Grand alliance manages twelve services in the transpacific trade. Lastly, this alliance has showed the most reliable configuration comparing to the other two alliances.

The greatest alliance is CKYH with key partners Hanjin, Yang Ming, K Line and COSCO. It counts 1.548.508 TEUs and 400 vessels (alphaliner.com). It manages eight services on the Europe – Asia route which has the largest capacity in TEUs. Surely, this alliance has a significant market share and also is highly competitive.

Of course, alliances have a significant impact in the market share, but it is difficult to cooperate as the size of the group increases. They choose to act like monopolists because they can affect the price. Competition makes contrary to other firms to play or join in the market. This characteristic is of particularly importance in order to survive in this tough market where overcapacity and decreasing demand may be serious problems. Firms may find many reasons why to join an alliance: strategic reasons, operational reasons, in order to increase or decrease connectivity and capacity, to raise or remove a service, to merge or demerge services and to provide slots for charter. (Panayides, 2011)

TRADE LEVEL

We will examine the trade level of two routes, Black Sea – Far East and US trade. Moreover, we will focus on the trade lines with port ranges at both ends (Brooks, 2000).

In the route Black Sea – Far East the top seven firms have a market share of total 89%, so the other firms contain only the rest 11%. Surely, there is an exceptionally high percent of concentration in this trade route. Moreover, MSC holds 23,15%, Maersk Line 20,33%, CMA-CGM 13,81%, Zim 13,55%, CSAV Norasia 11,64%, Hapag Lloyd 4,99% and K Line 1,53% (www.americanshipper.com). We can conclude that a tight oligopoly exists in the trade line of Black Sea – Far East. The production rose, and the price decreased because the firms now hold strong shares and perform more like monopolists. Furthermore, it is difficult for new firms to enter this lane.

The other trade line that we will examine is US which is more complicated than the previous one. Moreover, the top ten firms fit nearly a 65% of the total market share. So we can speak also that in the trade line exists an oligopoly, but the firms are much more and carry less market shares. Maersk Line market share is 15,27%, Evergreen 7,67%, Mediterranean Shg Co 7,20%, Hanjin 6,54%, APL 6,18%, Hapag – Lloyd 6,05%, COSCO Container Lines 4,28%, OOCL 4,26%, NYK 4,04% and China Shg C.L 3,90% (www.americanshipper.com). A close exam of this market shows us that competition is greater, but the market is larger and remarkably attractive to new firms. As a result, if we operate efficiently the oligopolistic characteristics firms will increase their market shares, and it will be more difficult for new firms to enter the market. Of course, it is difficult to cooperate efficiently when the size of the group increases, but can handle more reasonable the capacity and the competition something that is particularly powerful.

After analyzing these two different trade lines, we understood the meaning of the existence of the oligopolistic characteristics. Moreover, capacity can be handled more efficiently and control competition by increasing your shares.

GRAPHIC EXPLANATION OF THE IMPORTANCE OF OLIGOPOLISTIC CHARACTERISTICS IN THE GLOBAL CONTAINER SHIPPING INDUSTRY

Table 2I think a better explanation can be given by using a graph to indicate the importance of the oligopolistic characteristics in the global container shipping industry. Moreover, we know from theory that in perfect competition demand curve intersects Marginal Cost curve at the market price P* and it supplies quantity Q* (Mankiw, 2011).

The firms in this graph are price takers because there are no entry barriers. Now let see what an oligopolistic firm will make. It will reduce quantity to Q0 and at the same time will increase the price P0 until Marginal Cost equals Marginal Revenue. However, a deadweight loss (consumer and producer) can be created, meaning welfare losses to the economy. Lastly, we can observe a surplus for the firm as an oligopoly profit.

This result can be represented in the global container shipping industry by selling at greater prices and offering lower services. They can use smaller containers, slower services as the market becomes more oligopolistic. Secondly, firms may try to increase their market power or insert entry barriers. These two can cause to collusion practices. Moreover, greater concentration can create collusions and contract coordination costs.

Nevertheless, there are also benefits from the increase in concentration. A firm may increase its profits by taking market power from its opponents. This action can cause sensitive to the firm to provide a better product or service. In the shipping industry, a better product or service means to provide larger containers or to invest in research and development. Moreover, a firm may invest in order to keep consumers loyal to her. So companies can behave more competitively.

A better explanation for the price and quantity can be given by the cobweb model.

The cobweb model or cobweb theory can explain the cyclical demand and supply the container shipping industry. Moreover, when the price is high P1 the quantity is low Q1 and lower than Q2. In the next period (Q2-Q1) will reduce the price to P2. However, now Q2 is greater than Q3 meaning (Q2-Q3) will raise the price to P3. So we can conclude that when there is excessive demand price will increase and fall when there is excessive supply. Concluding, demand and supply, are both quite flexible in the global container shipping industry, specifically in an annual base.

The importance is that freight rates are flexible and negotiable between shippers and carriers. Marginal cost can be considered remarkably low. Lastly, in short-run when a rapid growth may occur in the demand can be faced sufficient.

The kinked demand curve can describe the behavior of the firms in oligopoly market. Moreover, the model predicts that firms do not compete in price and try to keep the price stable over time. However, in short-term there may be price fluctuations and firms may try to gain some extra market power.

The importance is that firms will use other methods to increase market share than price competition. Furthermore, they can provide higher quality, more frequent services and other upgrades to keep their costumers loyal.

As the market is acting like an oligopoly, it has resulted in two main trends. First, there has been an increase in container ship sizes. Secondly, there has been an important advance in container throughput. Lastly, it has reduced the costs of transportation and local economies have been transformed to global economies.

CONCLUSION

The global container shipping industry is primarily an oligopoly (few players which offer similar services or products). I tried to introduce the importance of the oligopolistic characteristics in this market. Moreover, I noticed that large alliances control the majority of the total market share and also high concentration exists even in the trade routes. Highly concentrated markets experience in many occasions to collusions or cartels. It is particularly dangerous due to anti-trust laws, especially after the abolishment of the anti-monopoly immunity. However, such agreements are extremely valuable for the participating firms. Moreover, economies of scale can develop by using larger vessels and also provide superior quality of services. It is better off to combine, but it is extremely difficult especially when the size of the group increases. From the graphic explanation, we concluded that it is helpful to produce relatively small quantity and push prices above marginal cost. Nevertheless, it is up to the firms if they are going to have negative or positive results. In my opinion, the oligopolistic characteristics in the global container shipping industry led the market to grow and become competent to handle the occurrence of overcapacity and increasing fuel costs. Probably in the future stronger alliances and fewer firms will occur in the market, which is extremely influential in order to thrive and remain in such a demanding industry.