Optimal investment strategy in a container terminal: A game theoretic approach

Abstract

This article investigates the optimal strategy for potential investments that may be adopted by port authorities to attract more carriers. A mathematical model is formulated to represent the main criteria used by carriers to evaluate a specific port. Then, a game theory approach is used to model the competition between several port authorities to attract carriers via maximizing their utility functions. The game type suggested is Sealed-Bid with one round. The results indicate that the optimal investment strategy used by a specific port is dependent on (i) the port’s current state with respect to other competing ports; (ii) resource availability in terms of manpower and funds; (iii) expected profitability and (iv) other players’ reaction toward investment. This study advises the port authority on maximizing the payoff in case of winning the bid by selectively investing in the port and minimizing the potential loss in case of losing the bid by refraining from performing any investment. © 2016 Macmillan Publishers Ltd.