Tuesday, March 29, 2016

Could capitalism work better? (also in shipping, transport and logistics?)

In general, it is not in the interest of big business to show large profits, as this may potentially attract competition from newcomers. In the last twenty years, however, American profits have soared but new entry, domestic or inward FDI, has been scarce. Company size (cf. M&As) and consolidation on the one hand, and transaction costs (cf. regulatory lobbying by potent incumbents) on the other, pose significant barriers to entry that could explain all this.

In addition, and contrary to what was the tendency 15 years ago, i.e. un-commoditization of service (ocean transportation) and investment in complimentary sectors (logistics), so as to differentiate and thus command a premium price from the willing shipper, companies are again today reverting to core business, shedding ‘peripheral activity’ and aiming at greater market share in core business (transportation), through mergers and the strengthening of strategic alliances.

The Economist’s figure above shows that, in the past 20 years, companies have become more focused (and industries less fragmented), while, at the same time, the market share of the top 4 companies (CR4), in the 900-odd US sectors examined, has increased from 26% in 1997, to 32% today. The lack of entry, noted above, refutes William Baumol’s theory of contestable markets and, apparently, in the absence of effective regulation, concentration does lead to market power. For example, concentration in railroad transport in the USA has led to a 40% increase in profits, and a doubling of return on capital (RoC), in the last 10 years.

In conclusion, two thirds of the Americans believe that their markets are rigged. Maybe they have a point there, and this point is central in Hilary Clinton’s electoral campaign. If she is serious about this, i.e. on taking on concerted business practices, she most definitely deserves half a chance; just for this, if nothing else. HH