A strategic model of investment and price competition among container ports

The recent globalization of manufacturing and outsourcing led to an unparalleled growth in demand for containerized shipping services over the past years. Worldwide, ports have been making considerable efforts to appropriate a share of this rapidly increasing demand. Significant public and private resources are allocated toward modernization and/or expansion of container terminals.;The container port market structure is oligopolistic and unlike perfectly competitive firms or monopolists, oligopolists have to consider the policies of their competitors, because they engage in a market game in which their profits depend on the behavior of their rivals. Accordingly, the profitability of their investment decisions is highly dependent on the investment behavior of other competitor ports.;This study employs elements of non-cooperative game theory to develop a theoretical model of investment and price competition within the port industry context. To examine whether or not potential investment decisions yield profitable outcomes, three scenarios are analyzed: a static status quo model in which ports compete in prices and no investment occurs, a static model in which ports compete by being able to make both pricing and investment adjustments, and a dynamic model that accounts for a construction lag. Furthermore, an economic experiment is designed and conducted to test the theoretical model's predictions.;The experimental results reveal that investments are significantly above subgame perfect equilibrium predictions. Additionally, prices fall below their predicted equilibrium levels, and overall profitability is considerably lower than that obtained in the theoretical model. In the presence of these higher than expected levels of investment, both prices and profits are almost fifty percent less than their status-quo (non-investment) values. Results also show that an intensified level of competition leads to higher levels of investment.;These findings suggest that in a highly competitive market, ports may make strategic investment decisions to increase and/or protect market share that are likely to lead to overcapitalization by lowering port prices and reducing their profits. This study is intended to provide assistance to port planners in identifying whether there are situations in which investment costs can not be recovered.