Impact of rail transport services on port competition based on a spatial duopoly model

Abstract

Rail transport plays an important role in port-based freight flows. In the context of port competition, the change of inland transport modes would directly influence pricing strategies and profits of ports. Therefore, this paper provides a method to analyze how the introduction of rail transport services affect port competition. Firstly, a two-stage game model is constructed based on a Hotelling model, which consists of two ports and one rail operator. Then, this paper demonstrates how the existence of pure strategy equilibrium prices of ports depends on the value of marginal profits of rail transport services. After comparing the results of different situations, our analysis shows there is a negative effect on ports' service prices and profits when the rail transport services are introduced in the port. As shown in the numerical example, the profits of ports would be reduced by about 10% (when rail transport services are only provided to one port) and 20% (provided to both ports) respectively. From the perspective of government, there exists an incentive to support the development of rail transport due to the promotion of social welfare. In addition, the rail operator is also likely to expand rail services in order to improve profits. Finally, the effect of economies of scale of rail transport is extendedly analyzed and three policies are proposed to weaken the loss of ports’ profits, including implementing refunding scheme, setting price floor on port service price and providing government subsidy. The findings in this paper could provide support for the decision making towards comprehensive transportation management in coastal zone.