A game theory analysis of port specialization—implications to the Chinese port industry

The fast growth of the Chinese economy and its international seaborne trade has escalated the demand for high-quality and efficient port services. “Decentralization” of the port management regime has given local government greater freedom in port development and operational decision-making. However, major port capacity expansion in coastal areas, coupled with the slowing down of both the economy and trade growth over recent years, has led to overcapacity and excessive competition. Although both port specialization and government regulations are called for to address these issues, few studies have investigated the formation mechanism and economic implications of port specialization. This paper uses alternative duopoly games, namely a Stackelberg game and a simultaneous game, to model port competition, where ports provide differentiated services in the sectors of containerized cargo and dry-bulk cargo. Our analytical results reveal that inter-port competition can lead to port specialization in the following three ways. A port can specialize in a type of cargo (1) for which there is relatively high demand, (2) where it has established capacity first, or (3) for services which require prohibitively high capacity costs. Also, it is seen that overcapacity is likely if strategic port decisions are made simultaneously instead of sequentially. These results suggest that if there is a clear market leader, policy intervention may not be necessary. However, if no port has clear market power, then government coordination and intervention may be needed in order to prevent overcapacity and to encourage specialization.