How does shipping alliance affect port capacity investment and congestion

This study investigates the economic implications of alliance formation, focusing on port capacity investment as the critical channel affecting congestion and social welfare. We identify two potentially countervailing mechanisms governing the port’s investment incentives: the market effect, where economies of scale boost throughput and encourage investment; and the congestion-relief effect, where improved vessel coordination alleviates port congestion but may crowd out investment. Our findings reveal that while the net impact of the shipping alliance on investment depends on the relative strength of these forces, port congestion consistently decreases due to the alliance’s operational efficiency. Furthermore, although alliance formation improves total social welfare through direct efficiency gains, it does not resolve the structural inefficiency of the market: port capacity investment consistently remains below the socially optimal level. To address this distortion, we characterize the optimal capacity subsidy policy. We demonstrate that when alliance coordination acts as a substitute for capacity investment, the private incentive to invest weakens further, necessitating higher government subsidies to align private investment with the social optimum.