III - Market Structure And Competition

Summary

Competition has the twofold virtue of eliminating inefficiency and of doing so by a process internal to an industry. Provided firms are subject to strong market pressures, an industry will be self-regulating as far as performance is concerned. Whether a market structure is conducive to effective competition depends very much upon the ease of entry. If there is easy entry, firms already in the industry will lack market power either to earn long-run excess profits or to operate in the long-run with excessive costs. In contemporary jargon, such a market would be described as highly contestable.

The interisland shipping industry is a good example of a highly contestable market. The number of firms already in the industry is large and new entry is easy. This chapter will first identify the main sectors of the industry and then examine in detail the dry cargo liner sector.

THE SECTORS OF THE INDUSTRY

Regulation No. 2/1969 divides the interisland shipping into several separately licensed sectors. These sectors are distinguished according to characteristics of supply, primarily the type of vessel with some regard to the nature of its employment (that is, whether'tramp” or “liner”). Despite some substitutability of different vessel types in meeting shipper demands, these sectors are nevertheless a workable basis for economic analysis. Table 3-1 indicates their relative importance according to their share of interisland trade in 1981. It should be noted that the customs documents from which the figures are derived appear heavily to understate the role of small-scale shipping.

The largest individual sector, accounting for no less than 40 per cent of the total cargo flow, is the carriage by tanker of crude oil, petroleum and other refined products. However, because domestic oil tanker shipping is a monopoly of the state oil company PERTAMINA, this sector belongs more logically not to the interisland shipping industry but to the vertically-integrated oil industry. This study will therefore be confined to the other 60 per cent of interisland trade which may loosely be referred to as non-oil or dry cargo.