Hub port competition and welfare effects of strategic privatization

Private operation of port facilities is becoming increasingly common worldwide. We investigate the effect of port privatization in a setting with two ports located in different countries, each serving their home market but also competing for the transshipment traffic from a third region. Each government chooses whether to privatize its port or to keep port operations public. We show that there exist equilibria in which the two governments choose privatization and the national welfare of each port country is higher relative to a situation where ports are public. This is because privatization is a commitment to increase charges relative to public port charges, which allows for a better exploitation of the third region. For some parameter regions, port countries non-cooperatively choose public port operations, while they would be better off if both ports were private. However, customers of the third region are always better off if port operations are public. We further show that the port country with the smaller home market has a relatively strong incentive to choose private port operation.