The practice of charging different types of goods different charges is as old as the trade itself. It is the rule of thumb that the higher the cost of the cargo the higher the freight and insurance charges. Early evidence documents the use of price discrimination in early Britain concerning ship size and lighthouse charges. The taxation on freighted goods based on the value of the goods was also seen during the Ming Dynasty in early civilized China (Odlyzko, 2004). Price discrimination occurs principally in liner trades.
As shown by the Sicilian traders during the Depression, taking advantage of this unique phenomenon can have profitable outcomes. Stopford (1997, 102) states that it was by the modernization of their fleet so as to take advantage of the “special cargo”, that enabled some of them to rake in handsome profits even during that financially oppressive season. This is because there are commodities that are required even in times of scarcity. Their demand is minimally affected by the swaying of the prices in the global market.
The effect of this is the continual upgrade of fleet. The opportunities that exist in this field in future require the modernization of the fleet so as to effectively
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Investment in a new fleet will require heavy investment in capital which may cause the company to operate in a liability balance sheet but in the end will allow them to increase their profit thresh-hold (Stopford, 1997, 241). The truth of the matter is that there exists a trade off between investment and capital expenses. It is clear that by increasing the capital investment you increase the company’s capacity to rake in profit but also decrease their equity, especially if they have to loan the money needed.
In a time of recession such as now, the companies seeking to invest in modernization and upgrades will fond it hard to do so because of credit crunch. In fact it has been reported that companies are at the moment not honoring contracts for ship purchase as he ventures have been rendered economically unsuitable by the current credit crunch (Naked Capitalism, 2008). This is therefore an option that is only available as a precaution rather than a curative in light of financially slow periods.
The effectiveness of price discrimination in relation to these periods therefore will depend on the capabilities of the existing fleet to handle the upper priced commodities and thus suggests a precautionary rather than a curative measure as mentioned. It would also be prudent to have already established yourself as a company in the shipping of such goods before-hand so as not to be caught left footed in instances where you have the ships but no stable market force. (Stopford, 1997)