If instead of returning from B with a hold quite empty, the vessel made both voyages with a hold only half full, the result would be similar. It would then be in a position to make a low bid for further freight in both directions. If this entails no cutting of the rates for carrying the original goods, the vessel can take further goods with advantage at any rate above the merely variable costs.
Production which is Advantageous though it does not repay all Costs.—There are two general conditions under which it is advantageous, both in making goods and in carrying them, to extend production, though the further returns which are in this way gained do not cover all costs. First, the producer must have an unused capacity for making or carrying goods. In such a case it is possible to make or carry an increment of goods without entailing on himself an increment of cost that is proportionate to the amount carried. In his bookkeeping his original business is charged with costs amounting to a certain sum per unit of goods produced or carried. His further business is charged with a smaller outlay per unit.
Secondly, it must be possible to demand separate and independent returns for the different increments of goods, so that cutting the rate charged for one part of the traffic does not entail cutting the rate charged for the other. In the case of a manufacturer this is secured, either by carrying some goods to a remote and entirely independent market, or by producing some new kind of goods the low price of which will have no effect on the sales or the prices of the other kinds. In the case of the carrier it is accomplished in a variety of similar ways. He can take return cargoes at a low rate. If he stops at different ports along his route he can charge less for goods landed at certain ports than for those landed at others. He can classify his freight and carry some of it at a rate at which he could not afford to carry the whole. With the growth of traffic, however, this condition tends to disappear. Its existence requires that the carrier should have facilities only partially used. As the ship acquires fuller and fuller cargoes, it ceases to be advantageous to fill the hold with goods which pay lower rates than others; just as a mill, which may have run for a time partly on goods that yield a large return and partly on those which yield a small one, gradually discards the making of the cheaper goods as the demand for the dearer kind increases. The vessel which can get full cargoes of profitable merchandise will cease to devote any space to what is less profitable. In the end the ship in our illustration will be transporting in both directions all the first-class freight it can take, and will accept neither the stone nor the merchandise consigned to ports to which it can be carried only at the cheap rates.
Result of Effective Competition throughout the Carrier's Route.—The condition just described—that of full cargoes of profitable goods—inevitably attracts a rival vessel, and the ordinary effects of competition then begin to show themselves. The vessels pursue the same route, cater to the same traffic, and if they try to get business from each other, bring down their charges. The warfare may even bring them to reduce the rates to the level at which only variable costs are covered—a policy that, if persisted in, would bankrupt them both; and here, as well as in the case of railroads, there is a powerful motive for combining and ending the war. It usually causes a merely tacit agreement to "live and let live"—a concurrent refraining from the fatal extreme of competition. The reductions, as made, have to be general and to apply to all parts of the traffic, and unless each part of the freight carried earns a pro rata share of the fixed charges incurred in the business, the traffic is carried at a loss. On the supposition which we have made—that the special and comparatively unprofitable increment of carrying was discontinued as soon as the first vessel could use its entire cargo space in transporting goods of a high class—the arrival of the second vessel may cause the less profitable carrying to be resumed, since there will not be enough of the better sort to afford two full cargoes. Moreover, a normal kind of competition will stop short of the warfare which drives both rivals into bankruptcy, and will leave the rates at a level at which the receipts of each carrier cover all his outlays.[2]
FOOTNOTES
[1] For a case in which a railroad can get the entire difference between the cost of goods at the point from which it carries them and their cost at the place of delivery, but voluntarily refrains from doing so, see the note at the end of this chapter.
[2] A full discussion of the limits of freight charges would take account of the fact that "what the traffic will bear" is an elastic amount. An infant industry will bear less than a mature one; and moreover, a rate that it will bear without being taxed out of existence may be sufficient to stunt its growth. A railroad may be interested in hastening its growth. When goods have one cost at A and another at B, a railroad company may carry them from the one point to the other for less than the difference between the costs because it wishes the industry at A to grow and furnish freight. Farmers who are introducing a new crop in a section of country remote from a market may be encouraged by a rate for carrying which leaves them a margin of profit. It is when a branch of production has more nearly reached its natural dimensions that the charge for carrying its product tends to approach its highest limit.