Regulatory Policy Institute
Annual Competition Policy Conference
Developments in the Enforcement of Articles 81 and 82
The New Shipping Guidelines
John Pheasant
September 2008
638382/1
The Early Days
•
First there was sail
•
Then there was steam
•
And then there were “liner conferences”
2
Early Antitrust Regulation in the USA
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Shipping Acts 1916, 1984
•
Antitrust immunity
•
Federal Maritime Commission
•
Ocean Shipping Reform Act 1998
3
The Position in Europe
•
Generally, transport, including shipping, excluded from the application of
national and then EC competition law
•
The adoption of Council Regulation 4056/86
4
What Did Regulation 4056 Do?
•
Articles 81 and 82 were applicable to shipping, as to other transport
sectors
•
But, the European Commission did not have enforcement powers
•
Regulation 4056 gave the Commission enforcement powers in respect of
international maritime transport except tramp vessel services
•
Exemption for liner conferences
•
Exception for technical agreements
5
Tramp Vessel Services
•
Defined in Regulation 4056 as:
“the transport of goods in bulk or in break-bulk in a vessel chartered
wholly or partly to one or more shippers on the basis of a voyage or
time charter or any other form of contract for non-regularly scheduled
or non-advertised sailings where the freight rates are freely
negotiated case by case in accordance with the conditions of supply
and demand”
•
Rationale for excluding tramp vessel services from the Commission’s
enforcement powers
6
The Liner Conference Block Exemption (1)
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United Nations Convention on a Code of Conduct for Liner Conferences
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Definition of a liner conference in Regulation 4056:
“a group of two or more vessel-operating carriers which provides
international liner services for the carriage of cargo on a particular
route or routes, within specified geographical limits and which has an
agreement or arrangement, whatever its nature, within the framework
of which they operate under uniform or common freight rates and any
other agreed conditions with respect to the provision of liner services”
7
The Liner Conference Block Exemption (2)
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Article 3:
Agreements, decisions and concerted practices of all or part of the
members of one or more liner conferences are hereby exempted from the
prohibition in Article 85(1) of the Treaty … which have as their objective the
fixing of rates and conditions of carriage, and, as the case may be, one or
more of the following objectives:
–
the co-ordination of shipping timetables, sailing dates or dates of calls
–
the determination of the frequency of sailings or calls
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the co-ordination or allocation of sailings or calls among members of
the conference
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the regulation of the carrying capacity offered by each member
–
the allocation of cargo or revenue among members
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What Pricing Agreements were Exempted?
•
Through intermodal freight rates: exemption for pricing agreements on the
inland leg?
•
When is a conference agreement an agreement between conference
members and outsiders? The meaning of “uniform or common freight
rates”
9
The Economics: The Stability Issue (1)
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The rationale for the liner conference block exemption:
“liner conferences have a stabilising effect, assuring shippers of
reliable services; whereas they contribute generally to providing
adequate efficient scheduled maritime transport services and give fair
consideration to the interests of users; whereas such results cannot
be obtained without the cooperation that shipping companies promote
within conferences in relation to rates and, where appropriate,
availability of capacity or allocation of cargo for shipment, and
income”
•
What does “stability” mean in this context?
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The Economics: The Stability Issue (2)
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Scheduled services
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Economies of scale
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Capacity indivisibilities
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High fixed avoidable costs
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Low short-run marginal costs
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The Economics: The Stability Issue (3)
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Mobility of capital
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Low entry barriers
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Divisible and variable demand
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Supply is periodic
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Limited opportunities for product differentiation
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Government support and excess capacity
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The Economics: The Stability Issue (4)
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Shippers benefit from
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Reliability
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Regularity
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Frequent services
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Availability of space
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The Economics: The Stability Issue (5)
•
•
Liner operators’ costs
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Capacity costs
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Fixed operating costs
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Fixed port charges
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Cargo related costs
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Other fixed costs
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Inland costs
Total capacity costs are not dependent on the total capacity made
available. Capacity costs can be lowered by increasing ship size and
reducing the frequency of service
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The Economics: The Stability Issue (6)
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Balancing customer benefits against liner operators’ costs
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In a perfectly competitive market: prices equal to marginal costs
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Sectors characterised by economies of scale: prices will fail to cover the
full costs of the service being provided
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Pricing above marginal costs
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The Economics: The Stability Issue (7)
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Liner operators’ revenues must be equal to total costs, including capital
costs
–
Prices higher than marginal costs
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Differential prices
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The Economics: The Stability Issue (8)
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Network externalities
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Additional users  congestion costs on other users
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Liner operators  increasing capacity and frequency
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In liner shipping: unrestrained competition leads to:
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small ships
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too few ships
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excessively high load factor
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The Economics: The Stability Issue (9)
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Short run price competition
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Long run price competition
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Non-price competition
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The Economics: The Stability Issue (10)
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Short run competition creates inefficient economic conditions for liner
operators
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Generically, short run competition raises stability problems in prices,
frequency and regular and reliable services
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No equilibrium
–
price competition
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scheduling competition
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price competition with capacity constraints
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The Economics: The Stability Issue (11)
•
•
Inefficiencies connected with short run price competition
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failure to hold efficient levels of reserve capacity
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delayed investment and overshooting of prices when demand is
growing
–
impacts on frequency of service and size of network
Summary: liner operators are inclined to under-invest when price
competition drives prices towards marginal costs
20
The Economics: The Stability Issue (12)
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Consequences
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monopolisation
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state subsidies
–
FAK pricing
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The Economics: The Stability Issue (13)
•
Agreements and responses to stability problems
–
conference agreements
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remaining short term price pressures
–
long run competition as pressure to conference agreement
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The Economics: The Stability Issue (14)
•
Stability: withdrawal of capacity  prices overshooting

introduction of capacity  withdrawal of capacity  prices
overshooting
=
loss of reliable, regular services
OR
•
Stability: stability of freight rates?
23
The Intermodal Pricing Issue
•
Far Eastern Freight Conference (FEFC)
•
Stability arguments
•
Legal interpretation of the scope of Regulation 4056:
“international maritime transport services from or to one or more
Community ports”
•
Port gate
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The Uniform or Common Pricing Issue
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Transatlantic Agreement (TAA)
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Independent action
•
–
tariff rates
–
service contracts
Agreement with outsiders
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Independent Action and Confidential Service
Contracts
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Uniform or common freight rates
versus
•
Individual confidential service contracts
and
•
Independent action on:
–
tariff rates
–
joint service contracts
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The Decline in the Use of Tariff Rates
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Tariff rates  “paper rates”
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Vast majority of cargo carried under non-tariff rates
 Criticism of the conference’s role in stabilising freight rates
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The devil and the deep blue sea
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The Beginning of the End
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Shipper Associations’ criticism of the conference system
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The stability arguments undermined
•
The review of the block exemption: only one outcome
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The Review
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Repeal of the block exemption (October 2008)
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Tramp shipping brought within the scope of the Commission’s enforcement
powers (October 2006)
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The Future: Liner Shipping
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No conferences to/from Europe
•
Normal competition rules apply
–
information exchanges
•
Other jurisdictions
•
Exemption for liner consortia: cooperation on technical, operational and/or
some commercial arrangements, but not prices
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The Future: Tramp Vessel Services
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The Chemical Tankers cases
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Tramp vessel pools:
–
the Commission’s early position
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“Price takers”?
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Efficiencies: joint production and joint selling
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The Future: Guidelines and Self-Assessment
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The Commission’s Guidelines (1 July 2008)
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More helpful for tramp operators than liner operators
•
Self-assessment and compliance
32
Dominance Issues
•
TransAtlantic Conference Agreement (TACA)
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Collective dominance
•
–
internal competition: independent action, etc.
–
external competition: price discrimination argument
Abuse: increasing membership of the conference = strengthening a
dominant position
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