OCEAN SHIPPING ECONOMICS: COMMENT

Abstract

The international ocean shipping industry is one of the few remaining bastions of regulation, having escaped the deregulation process in transportation during the past two decades. shipping on U.S. international trade lanes has been subject to collective ratemaking activity through the conference system since the late 1800s, and this activity has been granted antitrust immunity in a variety of forms under U.S. maritime law since 1916. Recently, attention has focused on the economic rationale for the current regulatory structure in ocean shipping, under the shipping Act of 1984. The salient features of this regulatory scheme include antitrust immunity for ratemaking and other collective activities by ocean carriers, mandatory filing and publication of shipping rates (including filing essential terms of contracts between carriers and shippers) and Federal Maritime Commission enforcement of those rates, and the right of conference members to take independent action by deviating from the established conference freight rate with advance notice. The unique features of the regulatory structure have spawned considerable policy debate. Both ocean shippers and antitrust regulatory authorities are perturbed by antitrust immunity extended to carriers for rate setting activities, claiming that these activities result in either supracompetitive freight rates or a compressed array of service offerings. The economic ammunition for such claims is empirical research showing that freight rates increase with the value of the transported cargo. (See Heaver, 1973; bryan, 1974; Jansson, 1974; Devanney, Livanos, and Stewart, 1975; Zerby and Conlon, 1983; and Jansson and Shneerson, 1986.) Some have interpreted this finding as evidence that conference pricing discriminates between groups of shippers based on differences in their sensitivity to changes in freight rates. According to this reasoning, the demand for relatively high-valued commodities is less sensitive to transportation cost changes because these costs represent a smaller percentage of the commodity's selling price. Since a monopolist or effective cartel maximizes profits by setting higher prices to customers that are less price-sensitive, it follows that a liner conference with market power would set higher freight rates for higher-valued commodities. This reasoning further concludes that liner conferences must possess market power because they would be unable to discriminate between shippers in a competitive environment. Of course, higher-valued commodities possibly are more costly for carriers to transport, due to higher implied damage liability and other factors. (See Sjostrom, 1992; Butz, 1993; and Clyde and Reitzes, 1993.) carriers, defending the need for antitrust immunity, claim that their industry is otherwise prone to destructive competition. The economic ammunition for that assertion is the characterization of ocean shipping as a market with an empty core, i.e., a market where cooperative arrangements among carriers or among carriers and shippers are required to attain a stable outcome. (See Sjostrom, 1989; Pirrong, 1992.) The empirical support for that claim has been limited, however. In his Ocean Shipping Economics, David Butz (1993) offers some important insights into the debate regarding the current behavior of the international ocean shipping market within the present regulatory structure. He assesses the common economic arguments supporting and opposing antitrust immunity for conference agreements and other collective activities by ocean carriers. While Butz makes a compelling case that some collective activities among ocean carriers may lead to greater efficiency in providing ocean transportation services, his arguments offer limited support for why these efficiencies would stem from the activities of liner conferences. In particular, one can effectively argue that liner conferences are ill-suited to foster efficiencies. The cost-reducing and service-improving activities that Butz identifies occur mainly outside the conference system. …