Strategic capacity competition and overcapacity in shipping

ABSTRACT

A game theory model is developed to study the overcapacity in shipping from ocean carriers’ strategic behavior with regard to capacity expansion in a competitive market. Capacity expansion is found to be a rational decision in both peak and trough shipping markets. The benefit of expansion is greater when the competitor also expands, but this in turn leads to chronic oversupply and Prisoner’s Dilemma. A numerical simulation is then applied to confirm the analytical results. This research explains the persistent low freight rate in shipping, and points out possible strategies for stakeholders in the shipping industry to maintain a healthy global logistics system in maritime transportation.

KEYWORDS:

• Normal form game
• capacity competition
• Prisoner’s Dilemma
• over-supply
• modeling

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. In Commissioner William P. Doyle votes on Maersk/MSC Vessel Sharing Agreement, FMC Agreement No. 012293 (http://www.fmc.gov/commissioner_doyle_votes_on_maerskmsc_2m_vessel_sharing_agreement/), it is stated that “the Agreement is not likely, at this time, through a reduction in competition, to result in an unreasonable increase in transportation service or an unreasonable increase in transportation costs.”

Additional information

Funding

This work was supported by the Hong Kong Polytechnic University [grant number G-YN69].