Excess Capacity and Entry Deterrence: The Case of Ocean Liner Shipping Markets

This paper attempts to shed light on the proposal that firms in concentrated industries may keep excess capacity to forestall entry or expansion by rivals. Excess capacity can deter entry by forming expectations on the part of potential entrants that dominant firms are capable of responding aggressively to threats. But in order to make a convincing case for excess capacity as a strategic entry deterrent, all potential sources of excess capacity must be considered simultaneously. These may include industry-specific structural factors, such as the divisibility of demand relative to supply, economies of scale or wide swings in demand. Ocean liner shipping exhibits structural factors that have led excess capacity for much of its history. It is a concentrated industry that until the late 1990s was dominated by price fixing industry groups known as liner shipping conferences. In spite of limited antitrust immunity granted by most governments to liner shipping conferences, excess capacity is and has been a persistent problem that could be a major cause of operational inefficiencies. As such, ocean liner shipping presents an ideal forum in which to distinguish between excess capacity that is an artefact of structural conditions of supply and demand and excess capacity that may be deployed as a strategic defense against opportunistic rivals. The results of a random effects model with instrumental variables show some limited support for the entry deterrence element of excess capacity in liner shipping. Maritime Economics & Logistics (2003) 5, 100–115. doi:10.1057/palgrave.mel.9100074