The great benefit of competition is the pressure upon firms to be efficient. Efficiency means production of the quality of service desired by consumers at least cost. Provided there is some degree of price competition, firms whose quality of service is poor, whose costs are high or whose profit margins are excessive will lose custom to their rivals and ultimately be driven out of business. Market sanctions upon inefficient firms have the great advantage of being internal to the industry. If these sanctions are effective, the industry' is self-regulating as far as efficiency is concerned.

In the case of the Indonesian interisland shipping industry, there is strong evidence of competition. As discussed in Chapter 3, the large number of firms and the ease of entry appear to ensure that individual firms cannot hold significant market power. In other words, firms have little scope either to sustain excessive costs or to charge excessive profit margins if they wish to remain in business in the long-run. These predictions of market structure seem to be borne out by observation of competitive behaviour: firms engage vigorously in both price and quality competition. What needs to be determined now is whether that competition is in fact effective in raising the level of efficiency in the industry.

Ideally the level of efficiency would be measured in terms of the costs and profit margins of individual firms. Unfortunately financial data are highly confidential. Even if data were available they would be unlikely to present an accurate picture of a firm's true financial position. Many firms in Indonesia keep multiple sets of books — a set for the bank, a set for the taxation authorities, and so on.

The approach taken below is therefore to focus not upon performance and efficiency per se but upon the process by which competition raises the level of efficiency. The first part of the chapter looks at some indicators — crude and partial though they be — of the dispersion of efficiency among the many firms in the industry.