[Paper Review] Industry Dynamics with Cartels: The Case of the Container Shipping Industry

Suguru Otani|arXiv (Cornell University)|Jul 21, 2024

Global trade and economics4 citations

TL;DR

This paper investigates how shipping conferences—explicit cartels in the global container shipping industry—accelerated market integration by boosting firm entry, investment, and shipbuilding through price markups of 20–50%. Using a novel structural model, it finds that cartels increased producer surplus and may have raised social welfare by encouraging industry growth, with tonnage-based profit allocation proving optimal for welfare maximization.

ABSTRACT

I investigate how explicit cartels, known as ``shipping conferences", in a global container shipping market facilitated the formation of one of the largest globally integrated markets through entry, exit, and shipbuilding investment of shipping firms. Using a novel data, I develop and construct a structural model and find that the cartels shifted shipping prices by 20-50\% and encouraged firms' entry and investment. In the counterfactual, I find that cartels would increase producer surplus while slightly decreasing consumer surplus, then may increase social welfare by encouraging firms' entry and shipbuilding investment. This would validate industry policies controlling prices and quantities in the early stage of the new industry, which may not be always harmful. Investigating hypothetical allocation rules supporting large or small firms, I find that the actual rule based on tonnage shares is the best to maximize social welfare.

Motivation & Objective

• To examine how explicit cartels (shipping conferences) influenced entry, exit, and investment in the global container shipping industry.
• To assess the welfare implications of cartels by comparing counterfactual scenarios with and without cartels.
• To evaluate the efficiency of different profit allocation rules within cartels, particularly those favoring small vs. large firms.
• To determine whether cartel interventions in early-stage industries can be welfare-enhancing despite price distortions.
• To construct a structural dynamic model using novel data on shipping conferences, firm behavior, and shipbuilding investment.

Proposed method

• Developed a structural dynamic model of industry dynamics incorporating firm entry, exit, and shipbuilding investment decisions under cartel regimes.
• Constructed a novel dataset combining published books and public sources to track shipping conferences, freight rates, firm participation, and investment from 1973 to 1990.
• Used counterfactual simulations to compare social welfare outcomes under actual cartels versus hypothetical regimes without cartels or with alternative allocation rules.
• Applied a full-solution method to ensure equilibrium uniqueness in a sequential game model with across-level but no within-level competition.
• Calibrated the model using historical data on freight rates, firm entries/exits, and shipbuilding activity across major trade routes (Transpacific, Transatlantic, Asia-Europe).
• Evaluated welfare using discounted present values of consumer surplus, producer surplus, and social welfare under different hypothetical allocation rules.

Experimental results

Research questions

• RQ1 To what extent did shipping conferences increase shipping prices and by how much?
• RQ2 How did cartels affect firm entry and shipbuilding investment in the container shipping industry?
• RQ3 What is the net welfare effect of cartels, considering both producer surplus gains and consumer surplus losses?
• RQ4 Which profit allocation rule—based on tonnage shares or firm size—maximizes social welfare in cartel arrangements?
• RQ5 Would eliminating cartels lead to lower social welfare due to reduced entry and investment incentives?

Key findings

• Shipping conferences increased freight prices by 20–50% compared to competitive benchmarks, reflecting significant collusive markups.
• Cartels significantly boosted firm entry and shipbuilding investment, accelerating the formation of a globally integrated shipping market.
• Producer surplus rose substantially under cartels, while consumer surplus declined slightly, resulting in a net potential increase in social welfare.
• The counterfactual simulation shows that cartels may enhance social welfare by encouraging long-term industry development and investment.
• The actual tonnage-based profit allocation rule was found to maximize social welfare, outperforming rules favoring large or small firms.
• In hypothetical scenarios, rules favoring small firms increased social welfare in some routes (e.g., Transpacific), while rules favoring large firms reduced it, particularly in Asia-Europe and Transatlantic routes.