Strategic adaptation and capacity investments for seaports under competition and climate-change uncertainty

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Seaports are highly vulnerable to climate-change induced events, which makes it necessary for them to invest in climate change adaptation measures to ensure operational continuity, as well as capacity expansion to accommodate the increasing demand for maritime transport. Meanwhile, investment and pricing decisions by ports can be largely influenced by inter-port competition. Against this background, we develop a game theoretic model to determine a port’s strategic decisions on capacity and adaptation investments in conjunction with service charge, considering inter-port competition and climate-change uncertainty. We characterize the equilibrium decisions of three competition cases based on port ownership structures: profit-maximizing ports, welfare-maximizing ports, and first-best outcome. Through our numerical validation, we find that when faced with higher climate risk, a port would invest less in capacity to expose fewer assets at risk, but would not always invest more in protection, as less capacity may warrant less protection investment. Its competing port, however, would increase both capacity and protection investments. Welfare-maximizing and first-best ports invest more in both protection and capacity but charge less service fees than profit-maximizing ports. When the climate risk at one port is low, the first-best case would result in a considerably higher investment level at the low-risk port and lower investment level at the high-risk port, compared to the welfare-maximizing case. High climate risk would result in underinvestment in both port capacity and protection due to inter-port competition.

, 48 pages

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G2311.pdf (4 MB)