Post-entry container port capacity expansion

• Published in: Transportation research. Part B: methodological 2012, Vol.46 (1), p.120-138
• Main Authors: Luo, Meifeng, Liu, Liming, Gao, Fei
• Format: Article
• Language: English
• Subjects: Applied sciences; Building economics. Cost; Buildings. Public works; Capacity expansion; Computation methods. Tables. Charts; Containers; Exact sciences and technology; Games; Ground, air and sea transportation, marine construction; Hydraulic constructions; Marine and water way transportation and traffic; Market preemption; Markets; Players; Port competition; Port facilities and coastal structures. Lighthouses and beacons; Ports; Pricing; Strategy; Structural analysis. Stresses; Transportation
• ISSN: 0191-2615; 1879-2367
• DOI: 10.1016/j.trb.2011.09.001

► We model post-entry pricing and capacity expansion using a two-stage duopoly game. ► For the ex-monopoly, expansion may not be a profitable strategy. ► The preemptive capacity may not be effective in preventing the growth of the newcomer. ► This model explains the growth of Shenzhen port in competing with Hong Kong port. Port capacity development is a critical strategy for the growth of a new port, as well as for the development of existing ones, when both new and existing ports serve the same hinterland but have different competitive conditions. To study this strategy, we develop a two-stage duopoly model that comprises the pricing and capacity decisions of two heterogeneous players serving an increasing market. We identify the necessary condition for a port to increase its profit through capacity expansion, and characterize the condition when preemptive pricing by the dominant player is neither credible nor effective in preventing the smaller player from gaining market share. We also find the pure-strategy Nash equilibrium in the capacity expansion game for two ports that have different price sensitivities, as well as different operation and capacity investment costs. We apply the model results to the container port competition between Hong Kong and Shenzhen after Shenzhen port started its container operation in 1991. Our analysis explains the transition of market power from monopoly to duopoly, the fast development of Shenzhen Port, and the possible market structure changes with the continuing increase in demand.