COMPETITION AND REGULATION

The poor performance of the interisland shipping industry has been seen to be the outcome of the often conflicting forces of competition and regulation. Competition has been a sanction against inefficiency because the market is highly contestable. Besides a large number of firms already in the industry, new entry has been facilitated by, in practice, fairly low barriers to entry and a large pool of firms able to diversify into interisland liner shipping should profitable opportunities become apparent. These structural conditions have predictably given rise to both price and non-price competition unimpeded by any form of cartelization. Over time more efficient firms with lower costs relative to their quality of service have been able to increase their share of cargo and capacity at the expense of less efficient firms. This process has been referred to as the ‘transfer mechanism'. Insofar as this mechanism has been effective, the industry has been able to rationalize itself.

The spontaneous improvement in efficiency through the forces of competition has been impeded rather than assisted, however, by the impact of regulation. Although efficiency has been a declared aim of regulatory policy, some measures have weakened the effectiveness of market sanctions. Thus, licensing policy has endeavoured both to reduce the number of firms in the industry and to restrict new entry. Exit has also been impeded by allowing less efficient firms, which in some cases have not even met licence requirements, to retain control of lucrative public facilities in the form of front-line godowns. Some less efficient firms have also benefited from the provision of subsidized investment funds through P.T. PANN. These effects of regulation help to explain why competition has not been more effective in reducing the dispersion of efficiency within the industry.

Yet if regulation has weakened the effectiveness of competition, so has competition frustrated the implementation of government policy. The attempt in 1974 to consolidate the many independent shipping firms into about a dozen groups was a failure — the groups were formed as required but never functioned as co-ordinated units and were soon disregarded.