New Building Prices: Demand Inelastic or Perfectly Competitive?

Abstract

Since the pioneering work of Zannetos in maritime economics, it has been well understood that prices of new vessels are non-stabilising. In the earlier literature, most of this behaviour has been attributed to market imperfections and externalities. In this paper, we test empirically the stabilising role of the prices of new vessels through the application of advanced econometric tests. Finally, we challenge the assertion that the sub-optimal behaviour of new building prices is due to market anomalies, such as subsidies, and propose a perfectly competitive paradigm that can successfully accommodate the observed patterns of new building price behaviour. Maritime Economics & Logistics (2004) 6, 312–321. doi:10.1057/palgrave.mel.9100115

The impact of shipyard and shipowner heterogeneity on contracting prices in the newbuilding market

“…This view is shared by Strandenes (2010) who suggests that one of the causes is strong labour unions in shipbuilding. Dikos (2004) suggests that an alternative explanation can be found within the framework of a functioning competitive equilibrium if the actions of shipyards are interpreted as a result of exercising real options to offer capacity under uncertainty. Adland and Jia (2015) argue that an order for a newbuilding can be interpreted as a forward contract with a typically downward-sloping price curve (i.e.…”

An empirical model of the bulk shipping market

“…As its p value is higher than 0.050, the price for new vessels seems to be sub-optimal (i.e., a satisfactory but not optimal price). The sub-optimal price may be due to the subsidisation patterns by governments in the ship building industry (Dikos, 2004), which leads to a lack of response of ship yards with respect to the market conditions for additional shipping capacity.…”

“…When sea transport demand goes up, freight rate would increase and accelerate investment in new vessels. As a result, new building vessel price will rise, stabilising the shipping market with a 'barrier' to excessive profits (Dikos, 2004). To increase the supply of sea transport at the period of high freight rate, ship owners increase their fleet size by purchasing new ships (Leach, 2004).…”

A directional relationship between freight and newbuilding markets: A panel analysis

“…Ships have been studied as capital assets, with asset pricing determined by measuring the net present value of expected earning potential (for example , Dikos, 2004;Alizadeh and Nomikos, 2007). The existing literature contributes to the forecasting of ship prices but the directional relationship between the newbuilding price and freight rate is left unexamined.…”

“…Thus, rather than estimating ship prices (e.g. Dikos, 2004;Mulligan 2008), we investigate this directional causality relationship by using the Granger causality test and impulse response analysis.…”