The optimal green strategies for competitive ocean carriers under potential regulation

Uncertain green regulation and market competition are two major external environmental factors for ocean carriers to consider when making their decisions on business operations. The uncertainty of the green regulation arises from the probability of its occurrence. It is assumed that ocean carriers can adopt one of the two green strategies, i.e., the equipment upgrade strategy or the slow steaming strategy, to comply with the potential green regulation. This paper aims to examine the stable green strategies as well as the pricing decisions of competitive carriers in the shipping market considering the service differentiation and the upgrade risk. A two-period game model is formulated to seek the sub-game perfect Nash equilibrium under potential regulation. We obtain the final sub-game perfect Nash equilibrium, i.e., when the probability of enacting regulation is sufficiently high, there is always one carrier that will adopt the equipment upgrade strategy. However, because of the joint impact of market competition and uncertain regulation, the two carriers will never adopt the equipment upgrade strategy simultaneously. In addition, our results show that the potential regulation sometimes may help the two carriers achieve the optimal outcome. Nevertheless, the carriers may fall into a “sub-optimal outcome” in some situations.