Timing and size decisions of green technology investment for competitive ocean carriers under green regulations

Abstract

In response to increasingly stringent green regulations, ocean carriers are transitioning their emissions reduction strategy from reducing ship speeds to investing in green equipment. However, because carriers face uncertain demand and a competitive freight market, it is challenging for them to determine the timing and size of green equipment investments. Hence, we construct a real options game (ROG) model to investigate green investment timing and size decisions by two competing carriers within the framework of green regulations. We derive the optimal investment timing and size for the two carriers under various strategies and examine the effect of key factors on the optimal decisions. We show that leaders’ investment strategies depend on the initial freight market size and differences in carriers’ investment costs. Moreover, we observe that stringent green regulations significantly incentivize carriers to make green investments earlier but result in smaller investment sizes. Surprisingly, high-growth and high-volatility weaken early investment incentives but result in larger investment sizes. Interestingly, high speed does not always incentivize early investment due to its dual impact on cost performance, i.e., improving service levels but raising fuel costs. Intense quantity competition accelerates the leader's investment but delays the follower's, whereas intense service competition delays investments for both but leads to larger investment sizes. Our work provides an economic explanation for the varying adoption behaviors of carriers and offers managerial insights for competing carriers and policy insights for the government.