Private port pricing and public investment in port and Hinterland capacity

We study duopolistic pricing by ports that are congestible and that share a downstream, congestible transport network with other users in their respective hinterlands. In the central set-up, local (country) governments care about local welfare only and decide on the capacity of the port and of the hinterland network. We obtain the following results. First, profit-maximizing ports internalize hinterland congestion in as far as it affects their customers. Second, investment in port capacity reduces prices and congestion at both ports, but increases hinterland congestion in the region where the port investment is made. Investment in a port’s hinterland likely leads to more port congestion and higher prices for port facility use, and to less congestion and a lower price at the competing port. Third, the induced increase in hinterland congestion is a substantial cost of port investment that strongly reduces the direct benefits of extra port activities. Fourth, imposing congestion tolls on the hinterland road network raises both port and hinterland capacity investments. We illustrate all results numerically and discuss policy implications.