Economies of Scale in International Liner Shipping and Ongoing Industry Consolidation: an Application of Stigler's Survivorship Principle

Abstract

Economies of Scale in International Liner Shipping and Ongoing Industry Consolidation: An Application of Stigler's Survivorship Principle

Karen V. Gregory

(ABSTRACT)

The international liner shipping industry has been undergoing major structural changes caused by a number of factors. Liner companies have responded to these challenges by engaging in mergers and acquisitions and by forming global strategic alliances. Many of these organizational changes have reportedly been undertaken to achieve, among other things, economies of scale. This paper systematically addresses two questions â whether there are economies of scale in international liner shipping, and if so, what are the implications of those economies for industry structure. To determine whether scale advantages exist, George Stigler's "Survivorship Principle" is used with current data in three phases. All three phases of the study show that increasing returns to scale are present. In each application of the survivorship test, small and medium sized firms experienced significant decline in their share of the industry's capacity, while the largest firms continued to gain market share over the 20-year test period. The existence of economies of scale at both the firm and plant level is most pronounced during the shorter 1987-1997 period, subsequent to significant regulatory changes. The study empirically verifies that economies of scale in liner shipping have been increasing in response to technology-driven productivity growth, regulatory changes, and higher world-wide trade flows. The pursuit of economies of scale also appears to be contributing to the consolidation occurring in the industry today via both mergers and acquisitions, and the formation of global strategic alliances. Lastly, the study discusses the implications of economies of scale on firm structure within the context of current industry economics, and evaluates business strategies presently being pursued.