Concentration of market power hampers shipping industry – PIDS study

At a glance

  • Despite policy reforms dating back to the 1990s aimed at fostering competition, the study said that domestic shipping industry in the Philippines continues to be dominated by a small number of key players.

Concentration of market power among major players that promotes anti-competitive practices remained a major challenge in the local shipping industry, according to a study by the government think tank Philippine Institute for Development Studies Research (PIDS).  

This was emphasized in a study authored by Philippine Institute for Development Studies Research Fellows Kris Francisco and Michael Ralph Abrigo, titled “Market Power in the Philippine Domestic Shipping Industry”. The study reveals the challenges posed by the dominance of large companies in the local shipping sector.

Based on the study, market control varies across freight and passenger services, leading shipping companies to adjust their pricing strategies accordingly. Thus, the PIDS study emphasized that “robust regulatory frameworks are needed to monitor market concentration levels, evaluate competition dynamics, and prevent anti-competitive behaviors. Such will contribute to a healthier and more competitive industry.”

“It is important to maintain competition at the route-level to prevent excessive market power that could harm consumer welfare and industry dynamics. Studies are crucial to inform policy decisions and craft better regulations,” the authors said. 

The authors warned that “the concentration of market power among major players raises concerns about anti-competitive practices, including price manipulation, reduced incentives for innovation, and limited consumer choices.”

Despite policy reforms dating back to the 1990s aimed at fostering competition, the study said that domestic shipping industry in the Philippines continues to be dominated by a small number of key players.

The authors cited data from a study in 2000 that already highlighted this issue, revealing that the top 10 shipping companies controlled 74 percent of the domestic cargo market. Furthermore, the top five container shipping lines held an even tighter grip, accounting for 82 percent of the total container throughput.

Meanwhile, a 2014 World Bank report revealed that more than 40 percent of 54 shipping routes were served by a lone operator, and almost a quarter were served by three or more operators.

But the authors said that this “oligopolistic” tendency of the industry was attributed to two key factors: economies of scale and service frequency. High maintenance and operating costs for vessels incentivize companies to expand their operations, spreading these fixed costs over a larger fleet.  

It also said that customer demand prioritizes frequent service over larger vessels with infrequent schedules. This dynamic can lead to one or two companies strategically focusing on high-volume routes, ultimately dominating those specific markets.

“The government desires some form of competition at the route level to deter companies from gaining too much market power, which could have welfare implications to consumers and the whole industry,” the authors explained. A more competitive environment where multiple operators can serve various routes could mitigate the negative effects of market concentration and excessive market power.

The study further reveals a correlation between a firm’s profile and its pricing strategy. Firms with a high market share, substantial fixed assets, larger workforces, and longer track records tend to impose higher markups. This aligns with expectations, as dominant players often leverage market power to raise prices. Firms operating outside the National Capital Region (NCR) also exhibit higher markups.

Additionally, the study noted that the market for cargo services has become relatively more competitive than the market for passenger services. This is because the level of markups on freight is set higher than the level of markups on passenger services. “We take this as a possible indication of lucrativeness in freight business that could have attracted more players to join the market,” the study said. 

Building on this observation, the authors mentioned another study’s findings that the presence of budget airlines in the passenger market creates a competitive landscape that is absent in the freight market. This suggests that competition from the air transport industry acts as a disciplining force, keeping markups for passenger shipping services in check.

While the study sheds light on the connection between firm characteristics and pricing strategies, the authors maintained that complexities of market power in the shipping industry deserve further exploration.