Optimal number of ports and implications for Korea’s port policy

Many governments around the world have strategically privatized their ports. The privatized ports try to maximize profits by setting higher charges for port services and attracting transship cargos. This paper shows that such privatization of ports can be complemented by adjusting the number of ports. Specifically, the purpose of this paper is to derive the optimal number of ports in cases in which ports serve transship and domestic cargos.

This paper constructs a theoretical model in which ports compete with each other for transship and domestic cargos. In the first stage, the government determines the number of ports. In the second stage, the ports compete with each other in quantity to maximize profits. The authors have derived the optimal number of ports that maximizes national welfare.

The optimal number of ports is expressed as a function of the slope of the demand curve, the slope of the supply curve, and the share of domestic demand relative to total demand for port services. It is shown that the optimal number of ports tends to increase as the share of domestic cargo increases. The optimal number of ports, n*, is given as n*=1/(1−θ), where θ denotes the share of domestic demand in total demand for port services, when the unit cost of port services is constant.

The analysis in the present paper is confined to the case of unilateral intervention by the government of the domestic country. Analyzing interaction among governments via competition policy would offer valuable policy implications.

The results of the current research offer important implications for Korean port policy in the context of maritime industrial changes, in particular, China’s New Silk Road initiative. In particular, the findings of this study suggest that Korea’s investment in ports should be concentrated on ports with competitive advantages.

Relatively scant attention has been paid to the possibility, or need, of strategic privatization being complemented by governmental competition policy. Filling this knowledge gap, the authors have shown that the government can mitigate the negative effects of privatization on domestic consumer surplus by introducing competition in the supply of port services.