Optimal Competitive Capacity Investments: Evidence from the Container Shipping Market

Posted: 5 Mar 2016 Last revised: 11 Nov 2022

See all articles by Xishu Li

Xishu Li

Lancaster University Management School; Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Rob Zuidwijk

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)

M. B. M. de Koster

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management

Date Written: February 22, 2018

Abstract

For nearly two decades, ocean carriers have been locked in an arms race for capacity, which has led to huge losses for many and even bankruptcy for some. We investigate the nature of this investment race by studying a long-term capacity investment problem in a duopoly under demand uncertainty. In our model, two firms make sequential capacity decisions, responding to each other's current and future capacity. We consider two types of strategies which differ in terms of how a firm considers the opponent's future capacity in its own strategy: a proactive strategy where the firm assumes that the opponent will respond using a certain strategy, or a reactive strategy where the firm assumes that the opponent's future capacity remains unchanged. In the proactive case, we allow the firm to have different assumptions on the opponent's strategy, representing different amounts of information the firm has on the opponent. For each type of strategies, we derive the firm's optimal decisions on both the timing and size of capacity adjustments, specified by an array of intervals for the optimal capacity in a given capacity space in each period. Using detailed data from the container shipping market (2000 - 2015), we illustrate how to plan competitive capacity investments, following our model. By comparing the optimal decisions specified by our model with the reality, we show that the realized capacity decisions of the leading carriers, which were often questioned as irrational, are close to optimal, assuming these carriers follow proactive strategies. By revealing the underlying structures of different strategies, that is, the stayput intervals, we show how a specific strategy brings value to firms under competition. Based on our results, we provide practical guidelines to carriers and firms which operate in a similar competitive market for implementing an effective competitive capacity strategy.

Keywords: capacity, dynamic investment, proactive strategy, Stackelberg competition, feedback policies

Suggested Citation

Li, Xishu and Zuidwijk, Rob A. and de Koster, M.B.M. René, Optimal Competitive Capacity Investments: Evidence from the Container Shipping Market (February 22, 2018). Available at SSRN: https://ssrn.com/abstract=2741864 or http://dx.doi.org/10.2139/ssrn.2741864

Xishu Li (Contact Author)

Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Rob A. Zuidwijk

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

M.B.M. René De Koster

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1719 (Phone)
+31 10 408 9014 (Fax)

HOME PAGE: http://www.rsm.nl/rdekoster

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