Vertical integration and its implications to port expansion

Abstract

Over the years many shipping lines have established terminal operation companies, with some set up as independent firms. However, port authorities and local governments have not always welcomed external investment and control with open arms. The economic implications and each stakeholder's best strategies remain unclear. This study develops an analytical model in order to study the effects of vertical integration, with a focus on shipping lines' investment in ports' capacity. Modelling results suggest that vertical integration between terminal operator and a shipping line leads to higher port capacity, port charge, market output and consumer surplus. It also reduces delay costs. All these results suggest that vertical integration can be an important source of synergy for the maritime industry. Although vertical integration increases the participating carrier's output at the expenses of non-integrating rival shipping firms, the overall social welfare is still improved, which is indicated through the numerical analysis. Therefore, port authorities and government regulators should carefully review the market competition status as well as port expansion plans.

A Literature Review, Container Shipping Supply Chain: Planning Problems and Research Opportunities

“…There have been voluminous studies addressing the various planning problems associated with vessel logistics. At the strategic planning level, commonly studied topics include horizontal cooperation and competition among shipping lines (e.g., [56][57][58]); and the vertical integration between shipping lines and other stakeholders along the CSSC (e.g., [59][60][61][62]). From the modelling perspective, these planning problems are often based on aggregated data or joined together with tactical and operational planning tasks in order to evaluate the effects of the strategic decisions.…”

Understanding the impact of demand shocks on the container port industry

“…Also, when a port authority has significant market power, the authors argued, it tends to introduce inter- and intra-port competition. Recently, Zhu et al ( 2019 ) emphasized the important role of vertical integration between carriers and terminals to achieve larger synergies in the maritime industry. They developed an analytical model to study the effects of vertical integration, with a focus on shipping lines’ investments in port capacity.…”

Vertical integration and capacity investment in a two-port system

“…In the literature, port investment is examined from two perspectives: under certainty (deterministic) and with uncertainty. Most studies examine port investment decisions in deterministic scenarios (e.g., Koh, 2001;Musso et al, 2006;Anderson et al, 2008;Luo et al, 2012;Tan et al, 2015;Xiao et al, 2012;Negenborn, 2014, 2017;Zhu et al, 2019). This approach often yields relatively concise solutions, thus making it easier to identify the economic intuitions behind the findings.…”

“…Each port is assumed to have only one terminal operator which is hereafter referred as the "port." Although recent studies discuss the vertical investment strategies of shipping lines (see, for example, Zhu et al, 2019), no studies examine this issue in a multiport setting. Rather, the existing studies only consider the vertical investment decisions of shipping lines when the ports have a monopoly status.…”