Strategic highway development in port competition: A game-theoretical approach

To enhance competitive advantages, many ports are investing in highway infrastructure to improve access to broader hinterlands. This paper examines the strategic decisions of an entry port constructing a highway to compete with an incumbent port for shippers in a shared hinterland. We develop a game-theoretical model involving the entry port, the incumbent port, and hinterland shippers. Two highway construction scenarios are considered: a dedicated highway exclusively for traffic destined for the entry port, and a non-dedicated highway that accommodates other traffic as well. We present the optimal decisions for both the entry port and the incumbent port in equilibrium. As for the entry port’s strategy of highway construction, we find that a dedicated highway benefits the entry port only if the demand function for the entry port is concave with respect to highway capacity. In contrast, a non-dedicated highway consistently proves profitable for the entry port. When both highway types are profitable, our numerical analysis further shows that the entry port should opt for a dedicated highway when the market potential is moderate or the construction cost is sufficiently high; otherwise, a non-dedicated highway is the preferred option. Furthermore, we propose a cost and toll profit-sharing mechanism in which the incumbent port participates in highway construction. We find that this mechanism enhances total profits and has the potential to achieve a win–win outcome. Our numerical analysis indicates that the likelihood of a win–win outcome increases with a larger market potential for the new highway, a lower toll price or a larger capacity for the highway connecting the incumbent port to the hinterland, or a larger capacity of the incumbent port.