Chapter 5.2 – Intra-Port Competition

Author: Dr. Thanos Pallis

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.

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.

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.

Related Topics


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