Partial backward integration in maritime supply chain with duopoly carriers: Incentive analysis and decision-making volatility

Abstract

Considering a maritime supply chain comprising a port and two competing carriers, we analyze their incentive for partial backward integration (PBI), a popular practice in maritime industry, where carriers acquire a portion share of the port. The analysis results reveal that the port is only willing to form PBI with the carrier who has a relatively larger potential market size. We find that, if and only if the non-acquiring carrier’s potential market size is neither too small nor too large, PBI will increase the total profit of the maritime supply chain. In addition, the optimal PBI percentage falls within a moderate range, generally under fifty percent. Moreover, the optimal percentage of PBI increases whenever any one of the competitive intensities, the potential market size of the nonacquiring carrier, or demand uncertainty grows. Interestingly, under the PBI strategy, both the acquiring carrier and the nonacquiring carrier exhibit reduced coefficients of variation in the freight rate when facing demand uncertainty, which indicates that PBI is able to mitigate the impact of market demand uncertainty on pricing decisions for both carriers.