Skip to main content
Log in

The LNG Market: A Game Theoretic Approach to Competition in LNG Shipping

  • Original Article
  • Published:
Maritime Economics & Logistics Aims and scope

Abstract

The Liquefied Natural Gas (LNG) trade is one of the most promising sectors in energy shipping. It is expected that competition will increasingly develop in the shipping segment of the LNG chain, which at least in its first phases will have the characteristics of an oligopolistic market. The LNG shipping market context is appropriate for the adoption of a (non-cooperative) game theoretic analysis framework to support decision-making. This paper focuses on oligopolistic competition in LNG shipping over the transportation capacity supplied to a trade route by competing shipping companies. It also examines the possibility of non-cooperative collusion among the competing parties, in order for them to share higher profits. The conclusions concern the optimal level of capacity supply by the competitors, under certain interaction settings, and the conditions under which they can sustain Pareto efficient equilibria.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
Figure 8

Similar content being viewed by others

Notes

  1. Although ships of up to 270 000 cu.m. are under way.

  2. bcm: billion cubic metres.

  3. The players are unable to enter into binding and enforceable agreements. In cooperative game theory such agreements are possible.

  4. tcm p.a.: trillion cubic metres per annum.

  5. An outcome or equilibrium is Pareto-efficient when, by choosing another strategy, no player gains without another player loosing. In other words, when a player is made better-off, someone else is always made worse-off.

  6. On the boundary of the lens-shaped area, except from the intersection points of the isoprofit curves, one firm is better off and the other indifferent compared to the Nash equilibrium profit level.

  7. This situation corresponds to a prisoner's dilemma game and is a classic argument for why a cartel might be unstable.

  8. The leader knows that the rival will react to its choice, so it picks the point on the rival's reaction curve that maximises its profit.

  9. This is true, if the present value of maintaining collusion exceeds the present value of deviating from it. It can be easily proved that this will happen if the discount rate is small enough, that is if future profits are not discounted a lot (in this latter case the current profit matters more).

  10. Romp (1997), referring to the game theory literature, mentions that a more severe punishment strategy that lasts only for a temporary period is sustainable (a carrot-and-stick strategy). This is an application of the Folk Theorem, which shows that any capacity combinations that Pareto-dominate the minimax strategy are part of a subgame perfect Nash equilibrium provided that companies do not discount the future too much and that they adopt appropriate punishment strategies.

References

  • BP. (2007) Statistical Review of World Energy. June.

  • Chevalier, J.-M. (2004) Les grands batailles de l’énergie. Editions Gallimard 2004 (in French).

    Google Scholar 

  • Foss, M. (2005) Global natural gas issues and challenges: A commentary. The Energy Journal 26: 2.

    Google Scholar 

  • Gkonis, K.G. and Psaraftis, H.N. (2007) Investment rules and competition patterns in LNG shipping: A game theory approach, Proceedings of IAME 2007 Annual Conference; (CD-Rom) 4–6 July, Athens, Greece.

  • Gkonis, K.G. and Psaraftis, H.N. (2008a) A game theory analysis of the LNG market: The scenario bundle method and the security of gas supply for Greece, 2nd International Conference on Game Theory and Management (GTM 2008); Collected abstracts of papers edited by L. Petrosjan & N. Zenkevich, Graduate School of Management, St. Petersburg University (Volume of collected papers in press) 26–27 June, St. Petersburg, Russia.

  • Gkonis, K.G. and Psaraftis, H.N. (2008b) Early Commitment and Entry Deterrence in an LNG shipping market, Proceedings of 2nd International Symposium on Ship Operations, Management, and Economics (CD-Rom), SNAME Greek Section; 17–18 September, Athens, Greece.

  • Institute for Energy, Law and Enterprise. (2003) Introduction to LNG. University of Houston, Institute for Energy, Law and Enterprise, accessed at www.energy.uh.edu.

  • Jensen, J. (2004) The Development of a Global LNG Market. Oxford Institute for Energy Studies.

    Google Scholar 

  • Lloyd's List. (2007) LNG special report, 21 September.

  • LNG One World website. (2008) http://www.lngoneworld.com.

  • Petroleum Economist. (2007a) ‘Liquefied natural gas’ analysis. April 2007 issue.

  • Petroleum Economist. (2007b) ‘Shipping’ analysis. March 2007 issue.

  • Rasmusen, E. (2001) Games and Information, 3rd edn. Massachussets, USA and Oxford, UK: Blackwell.

    Google Scholar 

  • Romp, G. (1997) Game Theory – Introduction and Applications. Oxford: Oxford University Press.

    Google Scholar 

  • Schelling, T. (1960) The Strategy of Conflict. Cambridge, MA: Harvard University.

    Google Scholar 

  • Selten, R. (1978) The chain-store paradox. Theory and Decision 9: 127–159.

    Article  Google Scholar 

  • Shipping Economist. (2007) LNG shipping report, July 2007 issue.

  • Shipping Economist. (2008a) LNG shipping and finance – Taking a long-term view. August 2008 issue.

  • Shipping Economist. (2008b) Gas carriers data, August 2008 issue.

  • Smit, H. and Trigeorgis, L. (2004) Strategic Investment – Real options and Games. Princeton, NJ: Princeton University Press.

    Google Scholar 

Download references

Acknowledgements

The authors are very grateful to the Editor-in-Chief, Professor H.E. Haralambides, and the anonymous referees for some very useful observations, constructive criticism, and helpful suggestions which, we consider, have significantly improved this paper.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Konstantinos G Gkonis.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Gkonis, K., Psaraftis, H. The LNG Market: A Game Theoretic Approach to Competition in LNG Shipping. Marit Econ Logist 11, 227–246 (2009). https://doi.org/10.1057/mel.2009.2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/mel.2009.2

Keywords

Navigation