Competition and contestability in trans-Tasman liner shipping industry : a thesis presented in fulfilment of the requirements for the degree of Masters of Applied Economics at Massey University

Abstract

This study examines competition and contestability in trans-Tasman liner shipping industry for the period of waterfront deregulation. Contestability, often known as a benchmark in markets, is one of the most controversial issues of industrial organization theory. In this study, contestability in trans-Tasman liner shipping industry is analyzed, since this industry had been highly regulated and protected by trade union policy and practice until the recent waterfront reforms. Using a normative analysis, the study finds that parts of the trans-Tasman liner trade exhibit characteristics of contestability, such as frequent entry/exit, an absence of sunk costs, and pricing behaviour. In contrast to the predictions of contestability theory, actual competition, rather than potential competition has been found to have a substantial effect on market performance. Hence, the study further employs a "Conjectural Variations" model to examine firms' strategic behaviours. The simulation results indicate that since post-deregulation, a period of intensive competition has occurred. The study suggests that contestability theory may not be robust with small deviations from the assumptions. Instead, contestability theory supplements industrial organization theory with a new device specializing in performance implications of competition. In practice, the study concludes that deregulation has brought very substantial benefits to the shippers and to the national economy. As a result, a new wave of restructuring in the liner shipping industry and in the whole ports/shipping network is just beginning.