Minimum Efficient Scale (MES) and preferred scale of container terminals

Abstract

The decision on the scale of a port terminal affects the terminal’s managerial, operational and competitive position in all the phases of its life. It also affects competition structures in the port in which the terminal is operating, and has a potential impact on other terminals. Port authorities and terminal operators need to know the scale of the terminal when engaging in concession agreements. In economic theory the scale of a plant/firm is typically defined in relation to the Minimum Efficient Scale (MES), the long-run output where the internal economies of scale are fully exploited. However, there are a number of theoretical and empirical indications that in ports the scale of a terminal is commonly guided by a combination of the MES and other determining factors. The “preferred” scale is the result of a complex interaction between the MES, the port governance framework and objectives, the market size and structure, technological change and operational considerations, physical and geographical limitations, and the business patterns of shipping lines. This study analyses the factors resulting in a preferred container terminal scale that in most of the times is different from the MES. The analysis of the technical, market-related and governance-related factors is supported by theoretical and empirical insights that illustrate the presence of a range of actual ”preferred” scales of terminal concessions that usually are different, below or above, MES.