Scale Economies: An Economic Blessing? Should We Build Still Larger Ships?

Abstract

We represented shipping production using the Cobb-Douglas function: Q = A × Cα × Lb, which relates: 1) Capital, Labor and Production. 2) Indicates: Embodied technical progress; 3) the shares in production of Capital and Labor, and 4) the Scale Economies! We consciously digressed from “constant returns to scale”, and selected α + b > 1 for shipping industry and A = 1.07 due only to the higher speed of the vessel. We dealt also with the Marshallian artificial distinction of the economic periods in short and long. This we had to do it as the scale economies were related to long run, when capital (ships) is changeable. In shipping, we have the wrong idea that Capital and Labor quantities are fixed, and so isoquant lines are right angles. However, we accepted this as a working assumption, and also, we adopted complementarity between Capital and Labor. We showed also that shipping companies can be always in the long run! Shipping microeconomics is incomplete. The equilibrium of: 1) the vessel and 2) the shipping firm in the short and long run is missing. We attempted to provide these, as well industry’s equilibrium. Moreover, we showed the equilibrium… outside the equilibrium during a shipping depression and boom, when demand is either shorter or higher than optimal. We emphasized the technical efficiency of the vessels at shipbuilding stage, and then we introduced the iso-cost lines. Mathematically and diagrammatically, we identified the scale economies in maritime industry, where seaborne trade is the King. The typical bulk carrier from 34,000 average size in 1981 reached 81,284 dwt by 2011, judging by ships on order (2.4 times larger)! This paper revealed, however, that the Global financial Crisis in end-2008 curtailed scale economies! Two numerical examples used proved scale economies in maritime industry: the cost of building a 30,000 ship fell from $867 per dwt to $347 (for a 170,000 dwt), and the long run average total cost fell from $191 to $74… Also, for a 75,000-dwt tanker the long run average total cost fell from $13.08 to $6.72, for a ship 3 times larger. We found out also that ports “sabotage” scale economies in shipping as when the size of a tanker increased by 3 times, the port cost increased by 4 times! Our last warning was, however, that scale economies are a good thing, but they depend on the parcel size, and the other factors presented in the text, and in a final analysis they depend on appropriate, each time, individual demand (per vessel)! So, we may say to shipowners: build larger ships, if demand is there.