Governments' sequential facility investments and ports' pricing under service differentiation and uncertainty

Abstract

This paper examines optimal facility investments of risk-averse governments and optimal pricing of risk-neutral ports under service differentiation and demand uncertainty. We construct a three-period game, in which governments 1 and 2 choose their facility investments in the first and the second periods respectively, and then the two ports decide their service prices in the third period. We find that government 2 will invest more in facilities if government 1 does so when variations of the market demand are large. However, government 2 may not own higher expected utility than government 1. Moreover, we explore how the model's parameters affect optimal behaviours of governments and their ports. All of these outcomes remain true if uncertainty comes from the cost-side, or if the demand for ports' services depends on their facility levels.