Does the shipping alliance aggravate or alleviate container shipping market volatility

Abstract

Frequent and dramatic container shipping market turbulence has caused concerns among shipping stakeholders and governments around the world. While exogenous shocks such as economic recessions and pandemics are attributed to such turbulence, the changing shipping market structure with the formation of shipping alliances could also play a moderating role. The US government has begun to stipulate stricter policies that restrict shipping alliance development and aim to stabilize the freight rate. In this paper, we examine how shipping alliances can moderate freight rate volatility in the container shipping market. An analytical economic model is first derived to generate theoretical predictions, and an empirical study is then conducted by using real-world shipping market data to verify the theoretical predictions. Specifically, our analytical results suggest that shipping alliances can aggravate the volatility of freight rates when the market shock is from the demand side while alleviating the volatility caused from the supply side. Moreover, shipping alliances always lead to lower volatility in port charges. When the shipping demand (or shipping fuel price, respectively) is stochastic, the alliance-induced cost savings through economies of scale have no impact (or increases, respectively) on differences in volatility in both port charges and shipping freights with and without a shipping alliance. On the basis of panel data of 10 selected Chinese major container shipping routes from 2010 to 2021, a panel data regression model with two-way fixed effects (TWFE) is estimated. The empirical results confirm our analytical conclusions. We construct an integrated economic model to reveal that shipping alliances can affect market risk in a rather implicit way, i.e., through freight rate volatility, which has not been explored. Moreover, our empirical study results support the theoretical results and accurately quantify the impacts of shipping alliances on main international container shipping routes, thereby providing related policy implications for regulators.