I n t h I s c h a p t e r y o u w I l L

A s U . S . Tr a d e G r o w s , S h i p p i n g
C a r t e l s G e t a B i t M o r e S c r u t i n y
B
Y
A
NNA
W
ILDE
M
ATTHEWS
R
UTHERFORD
, N.J.—Every two weeks, in
an unobtrusive office building here,
about 20 shipping-line managers gather
for their usual meeting. They sit around a
long conference table, exchange small
talk over bagels and coffee and then be-
gin discussing what they will charge to
move cargo across the Atlantic Ocean.
All very routine, except for one de-
tail: They don’t work for the same com-
pany. Each represents a different
shipping line, supposedly competing for
business. Under U.S. antitrust law, most
people doing this would end up in court.
But shipping isn’t like other busi-
nesses. Many of the world’s big shipping
lines, from Sea-Land Service Inc. of the
U.S. to A. P. Moller/Maersk Line of Den-
mark, are members of a little-noticed
cartel that for many decades has set
rates on tens of billions of dollars of
cargo.
Most U.S. consumer goods ex-
ported or imported by sea are affected
to some degree. The cartel—really a
series of cartels, one for each major
shipping route—can tell importers and
exporters when shipping contracts start
and when they end. They can favor one
port over another, enough to swing badly
needed trade away from an entire city.
And because the shipping industry has
an antitrust exemption from Congress,
all of this is legal.
“This is one of the last legalized
price-setting arrangements in exis-
tence,” says Robert Litan, a former
Justice Department antitrust official. Air-
lines and banks couldn’t do this, he says,
“but if you’re an ocean shipping line,
there’s nothing to stop you from price
fixing.”
You could call them the OPEC of
shipping, though not quite as powerful
because they can’t keep members from
building too many ships. To get more
business, some of the shipping cartels’
own members undercut cartel rates or
make special deals with big customers.
They also face the emergence of new
competitors, which are keeping rates
down in some markets.
Nonetheless, the industry is playing
a bigger role now in the U.S. economy
as American companies plunge more
deeply into world trade. Exports over the
seas have jumped 26% in the past two
years and 50% since the start of the
decade.
For consumers, the impact is hard
to measure. Transportation costs make
up 5% to 10% of the price of most
goods, and increases in shipping rates
are usually passed on to consumers. A
limited 1993 survey by the Agriculture
Department, examining $5 billion of U.S.
farm exports, concluded that the cartels
were raising ocean shipping rates as
much as 18%. A different report, by the
Federal Trade Commission in 1995,
found that when shipping lines broke
free of cartel rates, contract prices were
about 19% lower.
“The cartels’ whole makeup is anti-
consumer,” says John Taylor, a trans-
portation professor at Wayne State
University in Detroit. “They’re designed
to keep prices up.”
Some moves are afoot to change all
this. The U.S. Senate is considering a bill
that, for the first time in a decade, would
weaken the cartels, by reducing their
power to police their members. The bill,
sponsored by Sen. Kay Bailey Hutchison
of Texas, has the support of some other
high-ranking Republicans, including Ma-
jority Leader Trent Lott. . . .
For eight decades, shipping cartels
have been protected by Congress under
the Shipping Act of 1916, passed at the
behest of American shipping customers,
who thought cartels would guarantee re-
liable service. The law was revised sig-
nificantly only twice, in 1961 and 1984,
but both times the industry’s antitrust im-
munity was left intact.
The most recent major review
was done in 1991 by a congressional
commission. It heard more than 100
witnesses, produced a 250-page re-
port—and offered no conclusions or
recommendations. . . .
The real reasons for years of inac-
tion in Congress may be apathy and the
lobbying by various groups. Dockside la-
bor, for example, fears that secret con-
tracts would enable ship lines to divert
cargo to nonunion workers without the
union knowing it. David Butz, a Univer-
sity of Michigan economist who has
studied shipping, thinks voters aren’t
likely to weigh in; the cartels aren’t a hot
topic. “It’s below the radar screen,” he
says. “Consumers don’t realize the im-
pact they have.”
S
OURCE
:
The Wall Street Journal,
October 7, 1997,
p. A1.
I N T H E N E W S
Modern Pirates

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C H A P T E R 1 6
O L I G O P O LY
3 5 5
“I could produce 30 gallons as well. In this case, a total of 60 gallons of water
would be sold at a price of $60 a gallon. My profit would be $1,800 (30 gallons 
⫻
$60 a gallon). Alternatively, I could produce 40 gallons. In this case, a total of 70
gallons of water would be sold at a price of $50 a gallon. My profit would be $2,000
(40 gallons 
⫻
$50 a gallon). Even though total profit in the market would fall, my
profit would be higher, because I would have a larger share of the market.”
Of course, Jill might reason the same way. If so, Jack and Jill would each bring
40 gallons to town. Total sales would be 80 gallons, and the price would fall to $40.
Thus, if the duopolists individually pursue their own self-interest when deciding
how much to produce, they produce a total quantity greater than the monopoly
quantity, charge a price lower than the monopoly price, and earn total profit less
than the monopoly profit.
Although the logic of self-interest increases the duopoly’s output above the
monopoly level, it does not push the duopolists to reach the competitive alloca-
tion. Consider what happens when each duopolist is producing 40 gallons. The
price is $40, and each duopolist makes a profit of $1,600. In this case, Jack’s self-
interested logic leads to a different conclusion:
“Right now, my profit is $1,600. Suppose I increase my production to 50 gallons.
In this case, a total of 90 gallons of water would be sold, and the price would be $30
a gallon. Then my profit would be only $1,500. Rather than increasing production
and driving down the price, I am better off keeping my production at 40 gallons.”
The outcome in which Jack and Jill each produce 40 gallons looks like some sort
of equilibrium. In fact, this outcome is called a 
Nash equilibrium
(named after eco-
nomic theorist John Nash). A