The Prisoner’s Dilemma and the Competition for Ultra-Large Ships

By | 17/09/2015

The Prisoner’s Dilemma and Nash Equilibrium

The prisoner’s dilemma, as so many people know it, is a theory that shows how two prisoners drop the best choice for the worst one because they can’t trust one another. It shows that the best choice for two prisoners lies in mutual trust and cooperation.


<Prisoner’s Dilemma Explaind by This Place>

In 1950 when he was 22, John Nash, the American mathematician, suggested the Nash equilibrium in his doctoral dissertation on non-cooperative games, thus presenting a mathematical proof that competitors can choose the best option through mutual trust and cooperation.

The Nash equilibrium suggests that when two persons each make the best choice according to one another’s responses, they reach a condition where they don’t feel the need to change their choices. Put differently, it is about pursuing the maximum mutual benefit by understanding and caring about how the counterpart tries to achieve gains instead of seeking one’s gain only. In a nutshell, the theory demonstrates that working with one’s counterpart to maximize one’s gains constitutes the best choice that brings gains to both parties.

For example, if the US and China as G2 pursue their respective economic interests and choose betrayal instead of cooperation, what would become of the world economy? In fine, the US and China would slip into an economic recession due to unnecessary costs for competition, which would drag the global economy as a whole. On the contrary, however, if the two countries take an option that would reinforce mutual cooperation, not only the two economies but also the global economy could create a basis for renewed growth.

 

The prisoner’s dilemma in shipping market

This has a lot of implications for container ship market, which is involved in no-holds-barred competition for ultra-large ships of 18,000TEU and above. In container ship market that awards superiority to shippers, individual shipping companies’ best option should be the strategy to secure sustainable cost superiority through ultra-large ships.

Moreover, the fact that the construction cost for ultra-large ships of 18,000TEU and above is about 7,500 dollars per TEU, 20 to 30% lower compared to very-large ships of 14,000TEU and above and that designed as eco-ships, ultra-large ships register excellent fuel cost reduction suggests that the competition for ultra-large ships is inevitably no-holds-barred. Furthermore, the self-seeking competition among shipping companies that want to increase their market shares through their cost superiority is fueling the competition in expanding their fleet of ultra-large ships.

Capacity of ordered megaships dwarfs capacity on the water

Capacity of ordered megaships dwarfs capacity on the water (IHS Maritime & Trade)

However, this just shows how those shipping companies are entangled in the prisoner’s dilemma. Clearly, it demonstrates a typical mutual distrust involved in the thinking: unless I get ultra-large ships, my rival will get them and thereby collect the benefits of cost superiority, which will cause damage to me.

 

Cooperation is needed among shipping companies for common interests

If shipping companies stay the course and continue to expand their fleet of ultra-large ships, it is likely that they will struggle to keep their market shares and their return on investment will come far below its current level, when they have spent an enormous amount of money. And this wouldn’t be an outcome that is desired by shipping companies that have already obtained or are going to obtain ultra-large ships.

Then, what should be done? As the Nash equilibrium shows, we need to explore a way to maximize the common benefits for shipping companies. As long as the market is dominated by shippers, unlimited competition among shipping companies is anything but beneficial to shipping companies. Therefore, it is a matter of urgency that shipping companies explore a way to refrain from racing to get ultra-large ships.

 

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 266