Optimal Competitive Capacity Investments: Evidence from the Container Shipping Market

37 Pages Posted: 5 Mar 2016 Last revised: 26 Aug 2021

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 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

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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