Port privatization under Cournot vs. Bertrand competition: a third-market approach

ABSTRACT

By incorporating port competition into a third-market model consisting of two exporting firms and one importing country, we demonstrate the endogenous choice of port structures (i.e. privatization or public ownership) under either Bertrand or Cournot competition. In contrast to previous studies on port competition, we analyze the port strategy in view of all trading countries (i.e. importing country and exporting countries). We find that regardless of transport cost, the port ownership strategy alters according to exporting firm’s competition mode. Under Bertrand competition, the choice of port ownership structure depends on the degree of imperfect substitutability. However, under Cournot competition, all trading countries choose same ownership structures of each port. By comparing equilibrium of each competition mode, we show that welfare of exporting country under Cournot competition is higher than under Bertrand competition if goods are sufficiently substitutes. In contrast, importing country prefers Bertrand competition to Cournot competition when the competitive pressure is sufficiently high.

KEYWORDS:

• Third-market
• endogenous choice
• privatization
• public ownership
• Cournot
• Bertrand

Acknowledgments

We are especially indebted to two anonymous referees for their careful and constructive comments. The first author acknowledges that this research is supported by Japan Society for the Promotion of Science [grant number15H03396] and [Grant Number 15K03749].The third author also acknowledges that this work was supported by the National Research Foundation of Korea Grant funded by the Korean Government [NRT-2014S1A3A2044643].

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. See De Borger and Proost (2012) for discussion of transport policy competition between governments.

2. While incorporating exogenous transportation costs into trade policy may be standard across countries, several recent studies on trade theory apply models with an explicit transportation sector. See Behrens and Picard (2011), Behrens, Gaigne, and Thisse (2009) and Takahashi (2011) for endogenous transportation costs. Since we focus on the relationship between the port ownership structure and market structure, we address the implication of exogenous transport costs for port competition under an import-competing setting.

3. Even though some readers may consider that the theoretical literature review is severely under developed, our step of paper forward requires linking ownership of port decisions, which may represent up-to-date analysis of the broad set of applications and the novel results in the port competition. Recently, many papers attempt to explain the privatization of firms in mixed international markets. Without port competition, Pal and White (2003) incorporate the public firms in the context of intra-industry trade in a reciprocal trade model (Brander and Krugman 1983) with tariff and subsidy regimes. Our setup of the theoretical model is somewhat different to those in the literature on the international trade although our motivations are quite similar.

4. For more details, see the website(http://www.ics-shipping.org.).

5. Brander and Spencer (1984a, 1984b) have shown that the tariff has a profit shift effect besides its effect on consumer surplus and tariff revenues. However, Horstmann and Markusen (1986) argue the profit shifting motive for the tariff disappears if there is free entry into the domestic industry with Cournot competition. See also Collie (1991) and Clark and Collie (2006) for optimum-welfare tariff.

6. This case is extracted from Kotra website (http://www.kotra.or.kr).

7. Source from http://automotivelogistics.media.

8. For more details, see the website (http://www.kmi.re.kr).

9. There is another example. South Korea is a coal importing market. Australia and Russia are main coal exporting countries to South Korea. Newcastle port is the largest coal exporting port in Australia, which is privatized. Vostochny port is a privatized coal exporting port in Russia. Pohang port and Gwangyang port are coal importing ports in South Korea. The two ports have different ownership structure which Pohang port is in public ownership, while Gwangyang port is privatized (http://www.kmi.re.kr).

10. , , , .

11. More equilibrium values under Cournot competition are in Appendix.

12.

13. Many emerging countries have different preferences between port privatization and nationalization according to their market circumstances. For example, Singapore, Hongkong and South Korea already privatized their ports because of fiscal and efficiency reasons. Also, Brazil and India, which are regarded as emerging markets, are recently considering port privatization. The advanced country, U.K. is the first country to privatize its ports.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science [grant number 15H03396] and [grant number 15K03749]; National Research Foundation of Korea [NRT-2014S1A3A2044643].