Shipping companies’ choice of low sulfur fuel oil with government subsidy and different maritime supply chain power structures

ABSTRACT Due to the restriction of sulfur content in fuel oil in the Emission Control Areas (ECAs), ships passing through ECAs have to adopt low-sulfur fuel oil (LSFO), and government will provide appropriate subsidies to shipping companies using LSFO. However, due to the different bargaining power between ports and shipping companies, it is necessary to study how the governmental subsidies affect the carriers’ choices of using LSFO under different power structures. In this paper, a game model considering one terminal and two carriers is developed to study the equilibrium solutions of two carriers under different power structures (terminal-dominated game, carriers-dominated game, Nash game), and then we analyze the impacts of government subsidies on maritime supply chain. The results show that whether for terminal or carriers, being leader in the game can always bring them higher profits. With the increase of the government subsidy, the demand of the carrier using LSFO will increase while the demand of the carrier who doesn’t use LSFO will decrease. High government subsidy not only reduces the profits of carriers not using LSFO but also puts the carriers more likely into the prisoner’s dilemma. The total demands and social welfare are maximized under Nash game.