Discussion ECO6 In Tutorial Library

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TITLE: Discussion ECO6

CLASS / COURSE: ECON

QUESTION DESCRIPTION:

The following describes the relationship between two major shipping companies hauling liquid chemicals:

 

Documents indicate that two shipping companies, Stolt-Nielsen SA and Odfjell ASA, colluded to divide up the market for transporting liquid chemicals across the sea.  The companies discussed which shipping business each would bid for, route by route, even exchanging information on bid prices. Stolt officials also developed tables showing the increase in revenues from cooperation compared to all-out competition.  The companies are unknown to most consumers, but they carry the chemicals that are used to make a variety of everyday products.

Carriers are allowed to cooperate in certain ways.  The may pool their capacity if they both carry chemicals for a given producer on the same route.  They may form joint ventures to bid for a piece of business.  However, cooperation to divide markets or set prices would fall outside these areas.

The alleged collusion was in response to the Southeast Asian financial crisis of 1997 that depressed the volume of shipping and a glut of new ships that decreased freight rates.  Chemical company mergers also increased the producers’ bargaining power, particularly the merger between Dow Chemical and Union Carbide in 2001.  Each of the shipping companies had important pieces of business with each of the chemical companies that were merging.  After the merger, either Stolt or Odfjell could be dislodged and price wars could break out.  Documents indicate that officials of the two shipping companies held talks on dividing the pie, reviewing contracts around the world, trade lane by trade lane.  Documents also indicate that the cooperation would keep freight rates 5 to25 percent higher than otherwise.  Stolt officials compared economic costs of “going to war” with cooperation.  On certain trade lanes, Stolt might benefit from individual action, but lower rates overall would result if the cooperation was abandoned.

Journals of company officials indicate that by April, 2001, both companies were threatening price wars if the agreements could not be maintained.  The journals are also filled with notations such as “no written agreements” or “no paper.”  Memos included the phrase, “Don’t be seen as doing something together.”

Explain how the discussion of cartel behavior in this chapter relates to this shipping company case

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1. Business Economics
2. Economics

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