Optimal Competitive Capacity Investments: Evidence from the Container Shipping Market
37 Pages Posted: 5 Mar 2016 Last revised: 26 Aug 2021
Date Written: February 22, 2018
For over 10 years, container shipping lines have been locked in an arms race for capacity, which has led to huge losses for many carriers and even bankruptcy for some. We investigate the dynamics of this investment race by studying a long-term capacity investment problem in a competitive market under demand uncertainty. In our model, two firms make sequential capacity decisions, responding to the opponent's current and future capacity. We consider two types of competitive strategies: a proactive strategy where the firm plans its capacity, assuming that the opponent will react using a given strategy, or a reactive strategy where the firm plans its capacity, assuming that the opponent's future capacity will remain 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. We derive the firm's optimal strategy in terms of timing and size in the form of an ISD (Invest, Stayput, Disinvest) policy. 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 shipping lines were close to optimal, assuming proactive strategies. By comparing the proactive and reactive strategies, in the numerical experiment we show the value of proactive thinking under competition and the value of information in the proactive strategy. Based on our results, we provide practical guidelines to shipping lines and other firms in a similar competitive market for implementing an effective competitive capacity strategy.
Keywords: capacity, dynamic investment, proactive strategy, Stackelberg competition, feedback policies
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