Introducing an External Terminal Operator or Not? The Decision of Ports in a Duopoly Market

Abstract

Facing with increasing competition, many ports are taking innovative approaches to improve productivity and profits. Among a variety of methods, introducing external terminal operators (ETOs) while the port acts as a landlord to collect “rents” from those operators for conducting terminal activities inside the port is regarded as an effective way and is commonly observed in practices. This paper analyzes the decisions of two competing ports about whether to introduce their respective ETOs using a three-stage non-cooperative game model when there already exists a port’s self-operation terminal operator (STO). At the first stage, the two ports simultaneously decide whether to introduce an ETO. If a port decided to introduce an ETO, at the second stage, it will further decide the unit fee to charge from the ETO. At the third stage, the two ports and the introduced ETO(s) simultaneously decide their respective profit-maximizing output levels. The findings indicate the equilibrium is both ports will introduce their respective ETOs, but when the ports and ETOs are substitutable in the sense of having the same level of productivity, the equilibrium solution is only one port should introduce an ETO. And simulation results show that even if one of ETOs is inefficient this still hold true.