Adaptation investment options for ports in response to shipping alliances

Abstract

In response to escalating climate-related disasters and market volatility exacerbated by shipping alliance dynamics, ports are strategically prioritizing adaptation investments to mitigate losses and enhance profitability. This study evaluates a seaport’s disaster adaptation investment decisions under two scenarios: when confronted with two independent shipping lines versus a unified alliance. The port’s investment strategy unfolds in two stages: initially, decision-making occurs under Knightian uncertainty, where disaster probabilities remain ambiguous, before transitioning to a phase of gradually refined information. Analytical results reveal that under Knightian uncertainty, adaptation investments diminish when expected disaster likelihood is low or variance is high. Conversely, larger economies of scale among shipping lines incentivize ports to escalate investments. Alliance formation amplifies economies of scale, spurring greater port investments while counteracting challenges posed by low probability estimates and informational ambiguity. Post-alliance, both shipping line capacities and port service fees expand. While social welfare typically improves following alliances, it deteriorates when shipping lines exhibit limited economies of scale and ports grapple with inaccurate disaster projections—conditions that fuel post-alliance overinvestment and suboptimal outcomes.