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 can be beneficial for the competitiveness of ports, local and national economies, and consumers and exporting industries. Its presence is conditional and may occur over terminals or through the provision of services. 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. Competing port terminals strive to attract and retain ship terminal calls for port-bound cargo, both on the foreland and in the hinterland. This is particularly the case for large container port complexes having multiple terminals under concession from terminal operators. Intra-port competition may also be observed in the provision of other services, either on the landside (such as warehousing, logistics, and value-added services) or on the maritime side (including pilotage, towage, mooring, and bunkering) of the port.

A variation is intra-terminal competition, which occurs when entities compete to provide the same services to a specific terminal. Intra-terminal competition exists in the largest ports that support an ecosystem of service firms. 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 within the same port complex.

Intra-port competition can be 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 serves as an engine of innovation and specialization, enabling the achievement of economies of scope and flexible, multi-service organization structures that are essential in modern seaports.

These positive effects inform policy initiatives at local, national, or supranational levels, aiming to lower market entry barriers and create 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 is rising, partly due to the emergence of global terminal operators.

2. Effects on Rent-Seeking Behavior

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 using 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 port owner, port service providers, labor (with high wages or a minimum workforce), governments (local or national), and users of (trans)port services. In the worst case, a port user has no alternative and is forced to accept 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 based on demand elasticity, resulting in abnormal pricing and rigid operational conditions for port users. 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 lack 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 earning any unwarranted profits, even if high barriers to entry exist in the port.

A. Captive and contestable hinterlands

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 certain port services, such as bunkering or ship supplies, as competition for these services is often acute. Then, the level of economic rent 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 refer to all areas where a port has a competitive advantage due to low generalized transport costs to those regions and handles the vast majority of cargo. For most ports, captive hinterlands are less prevalent.
• Contestable hinterlands comprise all regions where no single port has a clear cost advantage over competing ports. If the vast majority of cargo originates from or is destined for 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, characterized by 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 service 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.

B. Effects on port users

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 over captive shippers located in the captive hinterland, as they can charge higher prices than those applicable to 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, 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 operations 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 preventing 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 the liquid and dry bulk industries (such as Shell, Exxon, BP, and 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 a viable option. 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.

3. Specialization, Flexible adaptation and Innovation

Intra-port competition fosters specialization, innovation, and diversity in the provision of port services. It is, in principle, a level playing field for competition. Competitors face similar cost curves 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 that respond to individual demand and are 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 services (defined by the producer), aims to decrease average costs and achieve large-scale operations under conditions of certainty.
• The market world, based on standardized services, economies of scale, and differentiation, centers on competition focused 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 designing organizational structures based on economies of scale and economies of scope. The competition between several port service 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 fosters dynamism throughout 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.

4. 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 for providing a port service.

The Minimum Efficient Scale (MES) is the smallest scale at which a terminal provider can produce output at a minimum average long-run cost, assuming the terminal is operating with a given technology.

In the absence of this size, intra-port competition may be desirable but impossible to introduce since it would create a situation of overcompetition. There would be too much capacity or a level of service that exceeds demand, leading to a downward spiral of inefficiency. Once the size of a port service market is twice that of the MES, facilitating entry and exit in the port market by lowering other entry barriers is an additional strategy. Lower entry barriers increase the level of intra-port competition by enhancing market contestability, putting pressure on both existing port service providers and 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, such a wasteful allocation is unlikely to 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 adverse effect is that intra-port competition could generate additional externalities, such as pollution and congestion. This adverse 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

• Chapter 3.2 Terminal Concessions and Land Leases
• Chapter 5.5. Entry Barriers

References

• Chlomoudis C.I., Karalis V.A., and Pallis A.A. (2003) Port Reorganisation and the Worlds of Production Theory, European Journal of Transport Infrastructure Research, 3(1), 77-94.
• de Langen P. W., and Pallis A. A., (2006). Analysis of the benefits of intra-port competition. International Journal of Transport Economics, 33(1), 69-86.
• Goss R., (1990). Economic Policies and Seaports: 1. The economic functions of seaports, Maritime Policy and Management, 17(3), 207-219.
• Heaver, T.D., (1995). The implications of increased competition among ports for port policy, Maritime Policy and Management, 22 (2), 125-133.
• Kaselimi, E.N., Notteboom, T.E., Pallis, A.A. and Farrell, S., (2011) Minimum Efficient Scale (MES) and preferred scale of container terminals. Research in Transportation Economics, 32(1), 71-80.
• Notteboom, T.E., (2002). Consolidation and Contestability in the European Container Handling Industry, Maritime Policy and Management, 29(3), 257-269.
• Storper, M. and Salais, R., (1997). Worlds Of Production: The Action Frameworks of the Economy, London: Harvard University Press.