Intra-Port Competition

Intra-port competition refers to the presence of two or more firms competing

to provide the same services in the same port complex.

1. Intra-Port Competition
Intra-port competition is beneficial for the competitiveness of ports, local and
national economies, and consumers and exporting industries. Its presence is
conditional and might be facilitated by specific initiatives. This is most
commonly observed in terminal operations, where a terminal operator has
jurisdiction over an entire terminal area, from the berth to the gate, and
competes with other terminal operators responsible for other terminals.
Intra-port competition might also be observed in providing other services,
either at landside (warehousing, logistics, value-added services) or maritime
side (pilotage, towage, mooring) of the port.

A variation is intra-terminal competition, which is the case of entities

competing to provide the same services within the same terminal. Intra-
terminal competition exists in the largest ports. Together, these two types of
competition form an inclusive definition of intra-port competition as the
competition between two or more similar production units that provide
competing services in the context of the same port complex.

2. Benefits of Intra-Port Competition

Intra-port competition is beneficial for the competitiveness of ports, for local
and national economies, and for consumers and exporting industries.
Particularly:

 It prevents the potential of monopolistic excess rent-seeking by port

service providers who enjoy excess market power.
 It acts as an engine of innovation and specialization, allowing for
achievement of economies of scope and flexible multi-service
organization structures that are essential in modern seaports.

These positive effects guide policy initiatives at local, national, or

supranational levels aiming to lower entry barriers in the market and
generate conditions that enable intra-port competition in the provision of
port services. However, in most market segments and ports, market
concentration remains remarkably high and rising, partly because of the
emergence of global terminal operators.

A. Rent-seeking behavior by service providers

Intra-port competition suppresses monopolistic market power and, thus,
economic rent-seeking by port service providers. Economic rents in seaports
consist of the savings on the generalized transport cost that the use of a port
offers over the next best available routing. Their level is related to the price
difference compared to a second-best port. It may accrue to a variety of
actors, including the owner of the port, port service providers, labor (high
wages or minimum workforce use), governments (local or national), and the
users of (trans)port services. In the worst case, a port user has no other
alternatives and is forced to assume the fare structure dictated by the port.

The actual benefits of intra-port competition are positively related to when a

port faces imperfect or limited inter-port competition, with substantial
economic rent. Monopolistic power enables service providers to discriminate
according to demand elasticity, and port users experience abnormal pricing
and rigid operational conditions. When intra-port competition exists for all
port services, including competitive hinterland transport markets, all port
charges are based on cost recovery and provided efficiently. A similar case is
when port service providers are constantly under threat from potential new
entrants. Existing providers do not have market power as long as there are
low barriers to entry. Even if there is only one service provider, the threat of
potential entrants as soon as profit opportunities arise suppresses excessive
prices. This is known as the principle of contestability. In port ranges with
acute inter-port competition, such as the European market, economic rents
are improbable. Increased competition prevents intra-port monopolists from
acquiring any supra-normal profits even if high barriers to entry to the port
exist.
 
Conditions resulting in excess market power of port service providers

Intra-port competition is most important for port services that are a

necessary part of the overall port product. In other words, the service cannot
be purchased in another port. This is not the case for some port services such
as bunkering or ship supplies, as competition for these services is commonly
fierce. Then, the level of economic rents depends on the competitive
advantage of a port for serving a particular hinterland. Thus, the distinction
between captive and contestable hinterlands is useful. Captive
hinterlands are all those areas where a port has such a competitive
advantage because of low generalized transport costs to those regions and
handles the vast majority of all cargoes. For most ports, captive hinterlands
are less prevalent. Contestable hinterlands consist of all those regions with
no single port having a clear cost advantage over competing ports. If the vast
majority of cargo originates from or is destined to a contestable hinterland,
economic rents are small or non-existent. A similar distinction applies in
relation to primary hinterlands, the area where the port is well established,
and secondary hinterlands, with rivalry among ports.

If parts of the hinterland are captive and markets are not contestable,
opportunities for rent extraction by the port service provider exist when any
of the following three conditions are met:

 The share of the port services in total port costs is not substantial.
The overall port product consists of various services, such as terminal
handling, towage, pilotage, and ship handling. Port services providers
that are of relatively minor importance for the overall costs will hardly
lose business when they raise prices, as port users are sensitive to total
 port costs, rather than their individual components. Thus, such service
providers have market power.
 The captive hinterland is large compared to the contestable
hinterland. In this case, monopoly pricing is possible since many port
users cannot shift to an alternative port without facing substantial
additional costs. Monopoly prices increase revenues for service
providers, even if a part of the port’s users in the contestable
hinterland shifts to another port.
 Opportunities to differentiate prices in the captive hinterland exist.
Even when the captive hinterland is not sufficiently large to maximize
profits via monopoly pricing, it may be possible to charge port users in
the captive hinterland higher prices, since they can hardly shift to other
ports. Three different types of port users purchase port services:
shippers (cargo owners), shipping lines, and forwarders (or other
transport intermediaries). Unless they are located in a perfectly
contestable hinterland, shippers have the worst bargaining position
since switching to a second-best port leads to higher transport costs.
Port service providers have market power versus captive shippers
located in the captive hinterland as they can charge higher prices than
those applicable for contestable shippers. This explains why large
shippers in captive hinterlands frequently invest in user-owned port
facilities. However, most shippers do not have direct contracts with
port service providers. Instead, they have contracts with either shipping
lines or forwarders. The bargaining position of port service providers
vis-à-vis shipping lines or forwarders is substantially weaker because
these users might consolidate cargo with different origins and
destinations. Consolidation and the development of transshipment
hubs and the increasing efficiency of inland transportation limit
geographical powers and increase the cross-elasticity of demand for
ports. Price differentiation related to the origin/destination of the
cargo is not viable when shipping lines or forwarders purchase
services. In short, port service providers do not have market power vis-
à-vis shipping lines and forwarders in ports where the contestable
hinterland is so large that the loss of volume (volume effect) offsets the
additional revenues from the price increase (price effect), and the port
service is an important component of total port costs.

The experience from the privatization of terminal operation suggests that due
to the lack of intra-port competition, port users rarely face high tariffs and
request regulatory institutions to limit the monopolistic position of terminal
operators. Such regulation (whether created and monitored by a government
agency or by a port authority) incurs costs, such as monitoring costs,
including productivity and tariff controls. Furthermore, due to information
asymmetry between the regulator and the port industry, regulation is
unlikely to be ideal for the purpose of preventing all efforts to extract
monopoly rents. Intra-port competition is potentially a more effective way to
ensure competitive port tariffs.

The threat of rent-seeking by port service providers accelerates vertical

integration in seaports. By providing their own port services, port users can
prevent abuse of market power. Two kinds of port users, shippers and
shipping lines, frequently own and operate dedicated facilities. The
involvement of large shippers in port services is mainly aimed at preventing
exposure to market power. This explains why many shippers in liquid and dry
bulk (such as Shell, Exxon, BP, Corus Steel) own terminal facilities. Shipping
lines also own terminals, and these investments may be partially explained
by the above considerations, as they also stem from a strategy to offer door-
to-door transport services. In any case, user-owned port facilities prevent
rent extraction if the end products of the vertically integrated firms are sold
in a competitive market. This is the case for most user-owned oil, iron ore,
and steel terminals as well as most user-owned container terminals. Only
very large port users have the scale to develop dedicated terminals. In other
cases, terminals are owned by joint ventures of a limited number of port
users. For port users with only small cargo volumes, vertical integration as a
strategy to prevent rent extraction is not viable. Therefore, in several cases,
the problem of market power is not fully solved through vertical integration.
Under such circumstances, promoting intra-port competition remains
essential.

B. Specialization, flexible adaptation and innovation

Intra-port competition fosters specialization, innovation, and diversity in the
provision of port services. It is, in principle, competition on a level playing
field. Competitors face cost curves that are similar and operate within the
same regulatory framework, labor market conditions, trade costs, and
supplier bases. In such an operating environment, specialization of services is
more likely. This is especially important since the contemporary port product
is a chain of (specialized) interlinking functions that, in most cases, is better
offered by a network of firms potentially operating in different organizational
forms rather than as one single corporate hierarchy. In an environment
marked by flexible specialization and globalization of production as well as
the transportation of intermediate goods, port activities retain their
competitiveness by understanding user expectations and adjusting their
actions accordingly. This includes interactions between those involved in the
production and exchange of port services, such as service providers, labor,
users, and institutions.

Ports need to provide both generic services via a standardized process

defined in advance and dedicated services responding to individual demand
and based on the mobilization of specialized resources. Therefore, some port
network actors focus on standardized services, price competition, and
increased volumes of services. In contrast, others focus on an increased
range of services, concentrating on economies of scope and competition
based on the quality of products and services. Increasing the quality of
services, high flexibility and adaptability levels, close integration with other
transport modes, service and process innovation, better management, more
efficient labor regimes, and adaptability to users’ needs, are all goals whose
achievement requires ports that exhibit organizational structures
incorporating the following elements and principles:

 The traditional industrial world, focused on the efficient mass

production of generic (such as pre-defined by the producer) services
aiming to decrease average cost and achieve large-scale operations in
conditions of certainty.
 The market world, based on standardized services, economies of
scale, and differentiation, competition centered on price flexibility in
conditions of uncertainty.
 The interpersonal world, based on dedicated specialized services,
economies of variety, competition centered on quality, skilled labor,
and developing in conditions of uncertainty.

Intra-port competition creates conditions for the design of organizational

structures based on economies of scale and economies of scope. The
competition between several port services providers facilitates
entrepreneurship and creativity. This ensures that innovations are introduced
(and copied) and competing firms constantly aim to improve services to their
customers, a dynamic process that keeps ports competitive. Internal
competition leads to dynamism in the entire port cluster. Differentiation and
specialization enhance the performance of the cluster as a whole because
port users can purchase products and services that match their specific
demands.
3. Conditions and Effects of Intra-Port
Competition
The viability of intra-port competition depends on the presence of entry
barriers into a particular port market, with size an important consideration.
The relevant market should be at least twice as large as the Minimum
Efficient Scale (MES) for providing a port service. In the absence of this size,
intra-port competition may be desirable but impossible to introduce. Once
the size of a port service market is double the size of the MES, facilitating
entry, and exit, in the port market by lowering any other entry barriers is an
additional strategy. Lower entry barriers increase the level of intra-port
competition by enhancing market contestability, putting pressure on existing
port service providers and also on new and potential entrants.


Minimum Efficient Scale and Long Run Average Costs in Container
Terminals

A potential adverse effect of intra-port competition could be facility

duplication leading to a wasteful allocation of resources. However, under
the assumption that governments, including public port authorities, create a
level playing field and do not grossly subsidize port investments, it is hard to
see how such a wasteful allocation could persist in the long run under free-
market conditions. Furthermore, it is by no means apparent that such over-
investment would be more likely to arise in an environment with intra-port
competition.
The second potential negative effect is that intra-port competition could
generate additional externalities, such as pollution and congestion. This
negative effect is related to the issue of scale economies in port services and
may be present in specific cases. However, there are no compelling
arguments for a negative structural relation between intra-port competition
and negative externalities.

Source: Porteconomicsmanagement
Author: Dr. Thanos Pallis