Domestic freight, passenger markets apply different profit margins: report

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A recent study has called for the stronger regulation and monitoring of the Philippine domestic shipping industry, noting how elevated market concentration and high prices, particularly in freight services, undermine consumer welfare and industry competitiveness.

The report published by the Philippine Institute for Development Studies (PIDS) reveals that the local shipping industry continues to face challenges posed by the dominance of large companies in the local shipping sector. 

The discussion paper, titled “Market Power in the Philippine Domestic Shipping Industry,” observed that despite many reforms introduced to promote competition, domestic shipping operations remain concentrated in the hands of a few large players, affecting the welfare of consumers and raising domestic freight and passenger prices.

Data from a study in 2000 highlights this issue, revealing that the top 10 shipping companies controlled 74% of the domestic cargo market. Furthermore, the top five container shipping lines held an even tighter grip, accounting for 82% of the total container throughout, the report said.

Meanwhile, a 2014 World Bank report revealed that more than 40% of 54 shipping routes were served by a lone operator, and almost a quarter were served by three or more operators.

Great market power, especially when uncontrolled by a market-disciplining force, could lead to several economic consequences. One of these is higher markups. “When market concentration is high, the level of markups also rises,” said the report. Shipping firms without much competition can command higher prices to the detriment of the consumers.

Additionally, it was shown that those that usually impose higher markups are firms with high market share, high fixed assets, higher employment, and a longer stay in the business. “This is intuitive since firms in a dominant position have the tendency to exert market power through raising markups,” the document said.

Moreover, high market power could discourage business growth and innovation, resulting in lower demand for labor, lower capital investment, and distorted distribution of economic rents.

Another key observation is that between freight and passenger services, the former consistently imposes higher markups, largely because it is not constrained by additional competition from the air transport industry.

“… we found that the level of markups on freight is set higher than the level of markups on passenger services… a possible indication of lucrativeness in freight business that could have attracted more players to join the market,” said the report.

This is because unlike freight, the passenger market is facing more complex competition. “Budget airlines act as a close competitor for third class passengers, thereby serving as a constant threat to domestic shipping companies. Stated differently, there [exists] a strong disciplining force in the passenger market that is not present in the freight market,” said the report.

Study authors Kris Francisco and Michael Abrigo also noticed that firms operating outside of the NCR levy higher markups. Meanwhile, markups for inland water transport were found to be priced significantly lower.

The authors stressed the need to address the market dominance issue in the industry. “It is important to maintain competition at the route-level to prevent excessive market power that could harm consumer welfare and industry dynamics.”

They emphasized that the concentration of market power among major players raises concerns about anti-competitive practices, including price manipulation, reduced incentives for innovation, and limited consumer choices.

“A more competitive environment where multiple operators can serve various routes could mitigate the negative effects of market concentration and excessive market power,” the report added.

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