FTC Staff Comment Before the Advisory Commission on Conferences in Ocean Shipping Concerning Conferences in Ocean Shipping

COMMISSION AUTHORIZED
P915806
ST A TEMENT OF JOHN L. PETERMAN
DIRECTOR, BUREAU OF ECONOMICS
FEDERAL TRADE COMMISSION
BEFORE THE
ADVISOR Y COMMISSION ON CONFERENCES IN OCEAN SHIPPING
SEPTEMBER 13, 1991
Mr. Chairman and members of the Advisory Commission: 	I am John
Peterman, Director of the Bureau of Economics of the Federal Trade
Commission. 	It is a pleasure to appear today to discuss the views of the
staff of the Bureau of Economics of the Federal Trade Commission ("the
staff") concerning conferences in ocean shipping.!
The Shipping Act of 1984 required the Federal Maritime Commission
(FMC) to collect and analyze information concerning the Act's effects on
the 	ocean 	shipping 	industry 	and 	the 	FMC 	met 	that 	requirement 	by
releasing a report in September 1989. The 1984 Shipping Act also required
the FTC to conduct its own analysis of the Act's effects. 	The Bureau of
Economics prepared this analysis for the FTC, which was 	released 	in
November 1989. 	My purpose here today is to reflect some of the concerns
raised in this earlier analysis.
My comments focus on four areas: 	1) the effects of the 1984 Act; 2)
antitrust 	immunity; 	3) 	tariff 	filing 	and 	enforcement; and 	4) 	service
contracts.
The Effects of the 1984 Shipping Act
1 This statement 	reflects the views of the staff of the Bureau of
Economics of the Federal Trade Commission and does not 	necessarily
reflect the views of the Commission or any individual Commissioner.

The 	1984 Shipping 	Act 	represented 	a compromise, attempting 	to
balance 	the 	interests 	of 	carriers , 	who 	favored 	continuation 	of 	the
conference 	system, 	and 	shippers, 	who 	favored 	greater 	flexibility 	in
arranging 	shipments . 	The 	1984 	Act 	contained 	procornpet it ive 	and
anticompetitive features. 	Assessing the net impact of the 1984 Shipping
Act, 	and 	the 	likely 	effects 	of 	further 	alterations 	to 	the 	regulatory
structure, thus requires a careful review of the evidence available to the
Advisory Commission.
Our 1989 Report concluded that consumers generally benefit when
impediments 	to 	competition 	are 	removed . 	We also 	noted 	that 	the
procompetitive features of the 1984 Act -- providing carriers the explicit
right to take independent action after ten days' notice and permitting
carriers and shippers to enter into service contracts -- appeared to provide
such benefits in the form of lower prices and improved service. 	Yet, the
1984 Act also contained some potentially anticompetitive features. 	In
particular, the Act clarified the conference practices permitting the joint
setting of tariffs and other terms of trade that would qualify for antitrust
immunity 	and streamlined the 	procedures for 	FMC 	approval 	of such
conference agreements. These changes triggered an increase in the number
of conference agreements, and encouraged the development of so-called
"super-conferences ."? Some important agreements were filed after 1987, the
most recent year for which price data were a vaila ble for the 1989 FTC
Z See FMC Report, pages 	I08-113 for a d iscussion of the trends in
specific trades. 	For example , the FMC Report indicates that prior to the
1984 Act ten conferences operated on the Nort h Atlantic Trade. 	Shortly
after the passage of the Act, these conferences reorganized into two "super-
conferences .", In 1989, the two super -conferences were combined into a
single super-conference. The FMC Report notes that similar consolidations
and agreements have occurred in the Pacific trades. 	One particularly
important agreement is the Transpacific Stabilization Agreement, filed in
December 1988.
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Report. 	The Advisory Commission might consider examining closely the
effects 	of 	these 	recent 	changes 	made 	possible 	by 	the 	1984 	Act 's
clarification of antitrust immunity. 	In particular, it might be useful to
extend the statistical analysis of rates supplied in the Appendix to the
FTC's 1989 Report beyond 1987, which was the latest year for which data
were available to us.
In the staff's view, the removal of impediments to competition (e.g.,
antitrust immunity, tariff filing and enforcement, and restrictions on
entering certain types of contracts) typically tend to benefit consumers.
Our earlier analysis suggested this was probably the case in ocean shipping,
or at least that the case for the continuation of such impediments had not
been sufficiently made. Should the Advisory Commission recommend that
these types of restrictions be maintained in the ocean shipping industry, it
seems important that the theoretical and empirical justification for this
recommendation be more clearly articulated than has been the case.
Antitrust immunity
Even 	though 	ocean 	conferences 	had 	enjoyed 	some 	measure 	of
immunity from 	the antitrust laws since the 	1916 Shipping Act, some
confusion had arisen regarding the practices that were safely immune from
antitrust sanctions. 	One purpose of the 1984 Shipping Act was to clarify
which agreements among ocean common carriers would be exempt from the
antitrust laws. 	The Act appears to have achieved this objective: 	the
number of agreements filed with the FMC has increased markedly since
1984. 3
3 The FMC compared the number of agreements filed in the three years
prior to the Act's passage (1981-83) to the number filed in the three years
(continued ...)
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The structure of shipping markets and the level and structure of
shipping 	rates 	will 	depend, 	to 	some 	degree, 	on 	whether 	conferences
maintain their antitrust immunity, or whether this immunity is revoked.
As it considers whether to recommend any changes to the conf ere nces'
existing immunity, the Advisory Commission might attempt to estimate the
likely costs and benefits of continuing to provide antitrust immunity to
conference agreements. Antitrust immunity should then be extended only
if the likely benefits exceed the likely costs.
Because the staff cannot claim to be an expert on ocean shipping
markets, we are unable to offer you estimates of these likely benefits and
costs. 	We would, however, like to make several points that we believe
deserve consideration as you complete your review over the next several
months.
One concern raised by a number of carriers is that, absent antitrust
immunity, 	they 	would 	not 	have 	been 	able to 	negotiate 	a 	number 	of
agreements recently filed with and approved by the FMC. 	Some recent
conference agreements -- such as space chartering agreements , equipment
interchange agreements, and electronic data interchange agreements --
could reduce carriers' costs and, ultimately, shipping rates. 	But even in
industries 	that 	do 	not 	enjoy 	antitrust 	immunity, 	agreements 	among
competitors whose basic purpose is to lower costs or raise demand do not
necessarily run afoul of the antitrust laws. 	Many types of information
exchanges and operating agreements, for example, have been upheld by the
antitrust courts . 	The decisions have recognized that the exchange of
information and other joint operat ions may serve useful purposes. 	As a
3(... con tin ued)
after 	its 	passage 	(1985-87) 	and 	concluded 	that 	the 	number 	of 	new
agreements increased by 209 percent and that the number of modified
agreements increased 87 percent. 	See FMC Report, page 104.
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result, the courts have not applied a per se condemnation of otherwise
efficient agreements or arrangements.
The main question is whether much of the information sharing that
is required to negotiate conference agreements that lead up to joint tariffs
-- negotiations that typically would not be permitted under the antitrust
laws 	_. overcome 	nonetheless 	the 	presumption 	against 	it. 	We raised
substantial 	questions 	in 	our 	earlier analysis about 	the 	need 	for 	and
desirability of such joint agreements. 	Basically, the staff does not see
.antitrust as a bar to efficiency. 	In general, antitrust bars agreements
shown historically or theoretically to have harmful effects.
Proponents of antitrust immunity also argue that immunity is needed
to 	prevent "destructive competition." 	Few analysts have attempted to
define 	rigorously 	the 	characteristics 	of 	a 	"destructively 	competitive"
market, and both economists and antitrust enforcement officials have
treated the concept with some skepticism." Yet the key features of such a
market appear to be three: 	(1) sunk costs (i.e., costs that, once borne, are
forfeited if supply is withdrawn) represent a large proportion of total
costs; (2) cost conditions are such that new firms enter the market when
demand 	and 	prices 	are 	high 	even 	though, 	from 	a 	purely 	economic
perspective, such entry is ineff'icient.f and (3) demand is uncertain, causing
extended periods of excess capacity when demand falls. 	The existence of
significant 	excess 	capacity 	(which 	arises 	due 	to 	the 	assumption 	of
significant sunk costs) generates incentives for firms to reduce prices down
to marginal costs, prices which are too low to permit firms to cover their
total costs.
" See FTC Report, pages 15-16.
5 In economic terms, entry could be attractive in the short run but not
viable in the long run.
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Let 	us 	make 	a 	few 	points 	about 	the 	"destructive 	competition"
argument. 	First, entry and exit do not appear difficult in these markets,
suggesting that trade-specific sunk costs are not high. 	Because ships are
mobile assets, carriers would appear to have latitude in deciding where to
operate. 	Yet, the ease with which carriers can shift their capacity among
the various trades is unclear, particularly in light of the recent emergence
of "super-conferences ." 	The Advisory Commission should examine this
Question, since it seems to be an important element of the "destructive
competition" 	rationale 	for 	continued 	antitrust 	immunity. 	Second, as
detailed in our 1989 Report, there is little evidence to support the position
that shipping markets possess the characteristics necessary for "destructive
competition" to 	arise. 	In 	particular, econometric studies suggest that
economies of scale are not significant in maritime transportation. 	Thus
entry, when it occurs, would not appear to be economically inefficient.
Finally, if shipping markets do suffer from "destructive competition," the
appropriate remedy would appear to be regulating minimum prices and
entry into the industry. 	Currently, conferences do neither.f 	Thus, it is
unclear how providing antitrust immunity to conferences acts as a cure for
the problem posed, assuming it existed.
Tariff filing and Enforcement
The general issue of tariff filing is important. Since 1961, conferences
and independent carriers on U.S. foreign trades ha ve had to pre-file their
6 Conferences do, of course, set prices for their members. Their ability
to 	exert 	control 	over 	these 	prices 	is d iminished 	by 	the 	presence 	of
independent carriers and by the ability of conference members to take
independent actions. 	Conferences have no control over entry.
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freight rates with the FMC. 7 The requisite notification period is 30 days
prior to the effective date of a rate increase in the normal course of
business. 8 	The FMC polices the industry to ensure that carriers do not
offer unpublished discounts on these rates, a practice known as rebat ing.f
Conferences and independent carriers are also required by the 1984 Act to
file 	their rates on service contracts and include a description of the
essential terms of these contracts.
Tariff filing was initially introduced to ensure that carriers did not
price 	discriminate 	among 	individual 	shippers 	and 	to 	make 	price
information easily obtainable. 	It was also perceived as beneficial in that
it encouraged rate stability.l0 Tariff filing also facilitates the FMC's role
of policing against secret rebating activities.P 	As a result, it serves as a
cartel-enforcing device to the extent that conference carriers do not engage
in 	independent 	action. 	In 	addition, 	the 	notification 	and 	filing
requirements in the case of "independent action" may potentially exert
significant anticompetitive pressure. 	The filing requirement can also
facilitate anticompetitive interaction between conferences and independent
carriers. 12
7 	On domestic routes, tariff filing has been required since 1916.
8 FMC Report, p. 495. Ex-post tariff filing with the Federal Maritime
Board had been practiced since the 1930's.
9 	The practice of rebating was effectively outlawed by the Shipping
Act of 1916, and remains ou tla wed under the 1984 Act.
10 	FMC Report, p. 496.
11 	FMC Report, p. 486 and p. 575. 	The argument that tariff filing
reduces the FMC's monitoring costs, while obviously true, provides no
compelling basis for the regulation.
12 	For 	instance, 	the 	public 	posting 	of 	prices 	encourages 	price-
leadership behavior, where certain firms announce their price early in
order to encourage other firms to raise their prices.
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Some proponents of tariff filing claim that the elimination of filing
requirements would impede shippers from collecting accurate information
on transport rates. 13 	Costs would be incurred in collecting information,
and inefficiencies would arise. While it seems clear that the dissemination
of accurate rate information can help markets operate efficiently, it is less
clear 	that 	tariff 	filing 	and 	enforcement 	are 	needed 	to 	ensure 	that
dissemination, particularly when tariff filing and enforcement can have
independent anticompetitive effects. 	Indeed, market mechanisms already
exist 	to 	provide shippers and 	carriers accurate 	rate 	information. 	If
mandatory tariff filing were abolished, it would be expected that these and
other mechanisms would develop to provide the information demanded by
industry participants .
Profit-maximizing carriers have incentives to provide shippers with
easy access to information concerning their prices, and shippers have
incentives to spread this information to other market participants . 	If a
carrier offers a price lower than its competition, it would try to enlarge its
customer base by d isseminating information on price comparisons. 	In
trying to obtain the lowest price possible, shippers might often inform
. carriers of price offers made 	by 	rivals. 	Given 	the 	current 	industry
contracting structure, which includes clauses that release shippers from the
contract in the presence of low-cost alternatives, shippers may have an
impetus to collect and spread considerable price information. a
If tariff filing and enforcement were eliminated, shippers would
probably 	not 	have 	to 	consult 	a 	variety 	of 	sources 	to 	obtain 	rate
13 	FMC Report, p. 489.
14 	Such contract clauses, known as "Crazy Eddie" clauses, may also
reduce the incentives of individual carriers to offer price reductions.
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information. 15 Currently, 	shippers 	can 	use 	freight 	forwarders 	and
NVOCCs to obtain transport services and transport rates; the latter have
every incentive to collect rate information and find the low-cost providers
of services.l'' 	The elimination of tariff filing requirements could be
expected to enhance incentives to collect and distribute price information.
Finally, the tariff filing requirements make it 	more difficult for
carriers 	and 	conferences 	to 	adjust 	to 	changing 	supply 	and 	demand
conditions. IT The requirement of public notification of prices impedes the
ability of firms to respond efficiently to these changes. 	For instance, in
the event of a sudden market downturn, conferences would have to meet
in order to revise prices and then notify the FMC before their rates became
effective. 	In 	the meantime, conference profits and consumers would
15 This statement may appear inconsistent with the FMC's finding that
a 	majority 	of shippers surveyed support continued 	tariff 	filing 	and
enforcement 	by the FMC. 	(FMC Report, pp. 532, 534) 	However, we
interpret that result to indicate that shippers prefer more information to
less and that shippers want to obtain the lowest shipping rate possible, not
that 	they 	believe 	that 	those 	outcomes could 	not 	be 	provided 	by 	an
unregulated market. We also note that surveys of shippers reveal that they
strongly endorse independent action and would prefer to see it extended
to service contracts. 	(FMC Report, pp. 684, 648) 	Those responses appear
to indicate that shippers prefer the freedom to obtain price information
from individual carriers.
16 When regulated by the Civil Aeronautics Board, the airline industry
had a centralized structure for providing rate information. Subsequent to
"deregulation", consumers could receive rate information for most carriers
from any travel agent. Freight forwarders, which provide a service similar
to travel agents, would have equal incentive to collect and provide rate
information.
IT 	Relative 	to 	other 	industries, ocean 	carriers 	have 	considerable
incentives to adjust price to changing economic conditions. Slack demand
cannot be alleviated through inventory accumulation as in manufacturing
industries. 	Once 	capacity 	is 	established, 	an 	ocean 	carrier 	becomes
concerned with finding as many customers as possible to occupy its cargo
space. 	Thus, there are strong incentives to make price adjustments and to
provide information to customers concerning those adjustments.
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suffer. 18 	If firms were relieved of the tariff notification requirement,
they could change their prices more rapidly while informing prospective
customers of any changes. 	The prospect of lower adjustment costs might
also encourage entry into the ocean shipping industry, which would result
in even lower prices in the market for shipping services. 	It would appear
th i t requiring tariff notification imposes costs without providing benefits
that would not otherwise be provided through private market incen tives .J?
Service Contracts
Service contracts are arrangements between individual shippers and
individual carriers (or conferences) to transport a specified quantity of
cargo over a specified period. 	The 1984 Act requires that the essential
terms and conditions of service contracts be filed publicly with the FMC
and that the carrier (or conference) make these same terms and conditions
available to any similarly situated shipper.
Currently, conferences can decide whether to permit their members to
negotiate 	service 	contracts 	individually 	with 	shippers 	or 	whether 	to
channel all contracts with shippers through the conference at rates and
terms determined by the conference jointly. 	By-and-large, conferences
ha ve prohibited their members from negotiating directly with shippers (i.e.,
from taking independent action on service contracts .)
No issue seems to separate shippers and carriers more starkly than
whether conference members should have the right to take independent
18 	An individual conference member would, of course, be free to file
an independent-action tariff, which would take effect in ten days at the
most. 	:
19 Because tariff filing is currently required pursuant to statute, only
an act of Congress (and not rulemaking by the FMC) could eliminate that
requirement.
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action on service contracts. 	According to the 1989 FMC Report, "carriers
oppose, while shippers support, requiring independent action on service
con tracts."
Service contracts would not exist unless both the conferences and
shippers found them mutually beneficial. 	Contracting would likely be
even more efficient, however, if contracts between shippers and individual
carriers were permitted by conferences. 	A shipper-conference service
contract may allow conferences to set prices for these agreements that may
not accurately reflect the competitive incentives of the individual carriers.
By 	contrast, 	a 	shipper-carrier 	contract 	would 	be 	more 	flexible 	in
addressing the competitive conditions facing individual firms and also the
individual demands of shippers. 	Further, the elimination of the need for
coordinated action in changing contract terms would allow carriers to
adjust more rapidly to changing market conditions.
It is difficult to determine the likely effects of permitting conference
members to 	negotiate service contracts directly with shippers 	because
conferences 	tend 	not 	to 	give 	their 	members 	this 	freedom. 	Yet, 	one
temporary exception to this rule arose between 1984 and mid-1986 when
some conferences in the Far East trade allowed their members to enter
service contracts directly with shippers. 	Since mid-1986 the Far East
conferences have joined the others in proh ibiting their members from
entering service contracts not negotiated through the conference.
This 	brief episode 	in 	the 	Far 	East 	trade 	provides 	the 	Advisory
Commission 	with 	an 	opportunity 	to 	determine 	the 	l ikely 	effects 	of
allowing conference members to negotiate service contracts directly with
shippers . 	The 	Advisory Commission 	might conduct a 	review 	of 	this
episode, paying particular attention to the reasons given by the conference
for revoking its members' freedom to negotiate directly with shippers, the
1I

shippers' assessment of the impacts of this change, and any changes in
observable measures of market performance, such as prices and service
quality. The FTC's 1989 Report contained a brief analysis comparing the
rates in the Far East trades with those in the Atlantic trades , concluding
that the "decision to prohibit direct negotiations between their members
and shippers may have contributed to the upward momentum in inbound
and outbound transport rates between the United States and the Far East."
The Advisory Commission could scrutinize this time period more closely
to learn whether our initial assessment on prices is correct and, if so,
whether the changes can be explained by factors (such as differences in
service quality or differences in input prices) not related directly to the
decision regarding independent action on service contracts .
Conclusion
The Advisory Commission will be considering the likely effects on the
ocean shipping industry should conference antitrust immunity be revoked
and replaced by exposing conference practices to the existing antitrust
laws . 	Because conference antitrust immunity has existed, to some degree,
since 1916, it is difficult to visualize the industry without it. 	Nonetheless,
it may be instruct ive to draw from the experiences of other transportation
industries, which previously possessed substantial regulatory structures in
ways similar to the one that currently exists in ocean shipping. Since 1980,
federal deregulation has occurred in the trucking, railroad, and airline
industries. Opponents of deregulation had raised numerous concerns about
the potential changes. 	Yet, economic assessments of the effects of these
changes have indicated that deregulation generally reduces transportation
12

rates without sacrificing service Quality.20 	The concerns that are being
raised today by those who believe that the conference system must be
retained are similar to the concerns raised prior to deregulation in other
transportation markets. 	In deciding whether to recommend retention or
modification of the existing regulatory structure, the staff recommends
that the Advisory Commission consider whether ocean shipping markets
differ 	fundamentally 	from 	those 	transportation 	markets 	for 	which
deregulation 	has 	brought 	tangible 	consumer 	benefits, and 	from other
markets generally which seem to operate effectively without antitrust
immunity.
Price-fixing agreements among competitors tend to raise prices and
reduce output and facilitate price discrimination among classes of shippers .
These 	effects 	have 	been 	the 	reasons 	for 	concern 	with 	conference
agreements. Even if the agreements are open to competitors, they may tend
to encourage too much capacity or other forms of service competition and
also may permit price discrimination to continue. Such outcomes typically
harm consumers . 	The staff has not seen the arguments and evidence
sufficiently developed to show that these concerns are no longer justified -
- at least not on 	grounds of efficient pricing and resource allocation.
Other grounds of support may exist. 	These we do not discuss .
20 For an assessment of rail and trucking deregulation, see Winston et
al., The Economic Effects of Surface Freight Deregulation, The Brookings
Institution (1990). For airlines, see Secretary's Task Force on Competition
in the U .S. Domestic Airline Industry, U.S. Department of Transportation
(February 1990).
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