Does Chinese Port Industry Need More
Regulation? – A Game Theory Analysis
of Port Specialization
Weifen Zhuang (Xiamen University)
Meifeng Luo (The Hong Kong Polytechnic University)
Xiaowen Fu (The University of Sydney)
IFSPA 2013, HK
Outline
• Introduction
– Cooperation and Coordination
– Port Development in China
– Port Specialization
• The Economic Model
• Analysis
• Conclusion
2
Introduction
• Fast growth of Chinese economy and international seaborne
trade has escalated the demand for high quality and efficient
port services
• Excessive investment of many coastal cities
– Expand existing port capacity
– Develop new facilities
Year 2013
Year 2012
100 berths
96 berths
602 berths
Year 2008
Year 2000
(National Development and Reform Commission 2013)
784 deep-water berths
(a deadweight tonnage
above 10,000)
Introduction
• Fierce competition
– Slow down of trade growth rate in China
• lasting impact of financial crisis in US
• Economic recession in Europe
• Appreciation of Chinese currency
– No sign of slowing investment
– Underutilization of newly added port capacity
– Lack of cooperation leads to a tremendous waste of resources
• Debate on the role of government
– Encourage cooperation and coordination?
– More regulation or revert back to centralized planning regime?
4
Cooperation and Coordination
• Cooperate and compete (Song 2003, 2004)
– Ensure both sufficient competition and cooperation is not
straightforward with the trend of port privatization, devolution
and deregulation
• Coordinate or promote port specialization (Xiao 2005)
– Specialization provides foundation for cooperation, win-win
• Coordinated and balanced growth (MOT 2011 and State
Council 2013)
– Bohai rim: priority in coal and iron ore
– Yangze River delta: further invest in container, bulk goods and
sea-river transshipment
– Cruise service development in Tianjin, Shanghai, Guangdong,HK
– Foster port cluster development and form clear specialization
5
China’s ports:
6
Port Development in China
• Decentralization process
– Centrally planned system (MOT)
– “dual-track” system
• Local government have more freedom in managing
ports, with MOT only the right of approval for major
port development project
– Local government makes sole decision problem,
endorsed by MOT
• A surge of fierce competition in port
development
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Port Development in China
• Rapid increase in container sector
WTO
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Port Development in China
Figure 2 Bulk cargo throughput at major coastal ports in China from 2003-2011
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Port Development in China
Figure 3 Coal and container throughputs at 7 major pots in northern China
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Port Development in China
• With the slowdown in China’s trade growth rate, there is a
growing concern on the over-capacity and excessive
competition
• Some proposals
– Merge smaller ports
– Reduce competition through government regulation
• Ensure both sufficient competition and sufficient cooperation
is not straightforward
• If specialization is possible with free market competition, then
government intervention is not necessary.
• This calls for a formal investigation and motivates the study.
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Port Specialization
• Specialization discourages excessive
investment and cut-throat competition
– Achieve economies of scale with dedicated
equipment and fully utilize the infrastructure
invested
• A need to investigate the formation process
and economic implications of port
specialization
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Our Paper
• Goal
– Investigate the driving factors, market conditions,
economics implications of port specialization on port
operators, traffic throughout and market outcomes
• Method
– Analytical economic model
– Stackelberg vs. Simultaneous game
• Problems
– What would happen without coordination?
– How will inter-port competition lead to port specialization?
– When will lead to overcapcity?
13
The Economic Model
• Port service choice and specialization problem
• Two ports, port 1 and port 2, in a region
• Two types of demand
– Container cargo
– Bulk cargo
14
The Economic Model
• Basic parameters
– p = port service charge
– q = port output
– a = reservation price for a port’s service
• Demand function
• Two types of competition
– Stackelberg game
– Simultaneous game
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Port’s Strategies of Service Offering
Scenario I: port 1 offers service and port 2 offers no service, or each port
specializes in a mutually exclusive service (monopoly in specialized service)
Scenario II: both ports specialize in the same service (inter-port competition)
Scenario III: one port offers both services and the other specializes in one
type of service (monopoly & inter-port competition in one type of service)
Scenario IV: both provide two types of service (inter-port competition)
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Differences in Market Outcomes
Differences in market outcomes
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Competition Outcome Matrix
– Conditional on Relative Demand
Complete Specialization
• Natural specialization
– Each port has a high relative demand for one exclusive
type of cargo
• First-mover specialization
– If follower port 2’s relative demand for one type of
cargo, is moderate; but its relative demand for the
other type of cargo is high, then port 2 will specialize
only in the sector for
• (Long-term) specialization due to excess capacity
(may warrant government intervention)
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Discussion and Conclusions
• Without coordination, ports may invest in the
same type of infrastructure even if there is
insufficient demand
• Inter-port competition can lead to port
specialization
– For which there is relatively high demand
– Where it has established capacity first
– For services which require prohibitively high capacity
costs
• over-capacity is likely if strategic port decisions
are made simultaneously instead of sequentially
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Suggestions
• Government should be prudent about
introducing more regulation and central planning
in order to promote port specialization
– If there is a clear difference in market demand,
government coordination and policy intervention may
not be necessary
– If no port has clear market power, then government
coordination and intervention may be needed in order
to prevent overcapacity and to encourage
specialization
21
Q&A
• Thanks!
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