Cartel behavior: An empirical analysis of ocean liner shipping

This dissertation develops and estimates a simultaneous equations oligopoly model of the regulated international ocean liner shipping industry. In the formal model, firms set a monopoly price collectively and then determine quality individually. This approach is different from other regulatory models, because cartel price is determined by the firms themselves, not by an outside agent. Monopoly profits are not attained, because each cartel member myopically determines quality without regard for overall cartel profits. The model is expanded to include other factors that affect price determination. The cartel is presented as the dominant firm in the market, making cartel market share an additional factor in price determination. A third equation, one that describes aspects of market structure, is added to capture the additional simultaneity of the model introduced by the expansion of the price equation. These modifications produce a three equation model, simultaneous in price, quality, and market structure. The model is estimated both with ordinary least squares and two stage least squares regressions analysis. Several different forms of the estimation are used, including pooling the observations. A rate index is substituted for individual commodity rates as the measure of price. The empirical results are somewhat uneven. In the market share and quality equations, quality and barriers to entry both have a significant positive effect on conference market share. Unit value has a positive effect on quality, and the cream-skimming hypothesis is strongly rejected. In the rate equations, the theoretically indeterminate effect of the number of firms in the conference on rate is negative and significant. Both increases in market share and cost tend to increase rate. The major disappointing result is the negative effect of quality on rate. Recent legislation reduced government\u27s role in regulating ocean liner shipping. These empirical results indicate that some of the new provisions will tend to increase conference freight rates, while others will tend to decrease them. The net effect of these changes is therefore empirically indeterminate and awaits future research