Market Effects on Liner Shipping Alliances and Cooperation Strategies

Container shipping lines choose cooperation when it improves their profitability. The highly cyclical nature of demand for container shipping affects the profit of container shipping lines, and correspondingly, influences their cooperation strategies. Additionally, the profit of shipping lines depends on the fees they pay to ports and terminal operators, which, in turn, are influenced by the level of competition between terminal operators. Therefore, the motivation for shipping lines to ally is affected by the bargaining power they gain over customers, ports, and terminal operators. This research studies the combined effect of market demand and port competition on shipping line cooperation. An evolutionary game theory model is developed to study the dynamics of cooperation among shipping lines. Additionally, container ports and terminal operators compete to attract shipping lines by reducing their container handling fees while maintaining profitability. It is demonstrated that the cooperation among liner companies prevails as market demand increases relative to supply. Port and terminal operators' market power intensifies this effect by increasing fee savings. With high enough demand, cooperation dominates in the market in the form of vessel-sharing agreements or alliances. However, their evolutionary equilibrium cooperation depends on market shares, freight rate, and charter rate. Our computational results suggest that increasing demand fluctuations intensify cooperation, while increasing shipping capacity relative to demand weakens it.