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ECONOMICS AND INTERNATIONAL LINER SERVICES

The object of this paper is to discuss some of the problems involved in the pricing practices of international liner services. Concern is with liner services provided by shipping lines operating within the limitations imposed by a conference which controls the trade concerned. The attempt to find an acceptable basis for a maximization theory of conference pricing has not succeeded. The only possible basis for a maximizing theory is a subjective maximand. If one argues that conferences are rational, therefore they must be maximizers, therefore whatever they do is maximizing something, one can construct a maximizing theory. The limitations of such an approach are obvious. If the strict concept of maximization is abandoned, a determinate theory of conference pricing is impossible. But an explanation of conference pricing policy remains possible. Conferences do not attempt to maximize short-run profits. A perfectly sensible explanation is that, if they pitched all freight rates to the level necessary to do this, in the long run this would attract competitors who could cut rates to such an extent that the traditional weapons of the conference for retaining its customers would be ineffective. Pricing is, therefore, determined on a basis which will yield reasonable profits to the lines in the trade but will not attract extra competition. The rates determined in this way do not guarantee a profit to all lines. First, they are based on some concept, even if only implicit, of breakeven, so that when the volume of cargo coming forward is lower shipowners operate unprofitably. Second, they must assume some mixture of (A), (B) and (C) rated cargoes; and if the mixture changes in favour of (C) rated cargoes profits will fall. Third, the costs of ships of different nationalities may change in different ways: at the best the rates are a compromise designed to suit the needs of lines with differing costs. Clearly, the lines with higher costs are always more vulnerable than those with lower costs. The weakness in the position arises from the arbitrary structure of rates. Rate making may be intended to be deterrent in the long run, but the existence of discriminatory pricing means that in the short run some rates are non-deterrent while others, taken on their own, are deterrent even to the lines in possession. The rate structure produces another serious weakness. Changing cargo composition alters the profitability of the conference lines. An increase in the flow of some cargoes rises (C) rates to the (B) or even (A) level, so increasing profits and attracting outside competition, even though the increase in some cargo is matched by a decline in other types. The conferences appear not always to appreciate this. Conference rate making cannot be explained in terms of maximization, partly because deterrent pricing and maximizing pricing are incompatible, partly because of the lumpy nature of entry and the uncertainty regarding the costs of entry. The idea of deterrent pricing appears to be acceptable as a long-run explanation of conference behaviour, and, in terms of the long-run survival and profitability of member lines, is rational. But the arbitrary nature of the rate schedule and the blanketing of ports destroys much of the deterrent effect of the overall pricing policy. The attempts by the conferences to restrict freedom of entry are largely attempts to counter this short-run weakness. None of this would be necessary if rate-making were deterrent in the short run and in the long run, that is, if all rates were based on costs of carriage plus a normal profit. Many traders would argue that such rates would serve the needs of trade less well: in terms of overall resource allocation they would serve those needs much better.

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    London School of Economics and Political Science

    Houghton Street, Aldwych
    London WC2A 2AE,   England 
  • Authors:
    • STURMEY, S G
  • Publication Date: 1967-5

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  • Accession Number: 00032673
  • Record Type: Publication
  • Source Agency: London School of Economics and Political Science
  • Files: TRIS
  • Created Date: Apr 28 1972 12:00AM