A. Price Elasticity of Demand for Port Service
The price elasticity of demand for a port service describes how responsive (sensitive) demand is to a change in the service’s price within a specific market.
ED = – (Δq/q) / (Δp/p) = – (Δq*p)/(Δp*q)
Where:
- ED = Price elasticity of demand
- q = Quantity of the service demanded
- p = Price of the service
- Δq = Change in the quantity of services demanded
- Δp = Change in the price of the service
The elasticity of demand for a port service is measured between two points on the demand curve (arc elasticity). It is always negative, as it represents the percentage change in the quantity of port services demanded in response to a positive percentage change in price. Often, the negative sign is omitted, given the well-established inverse relationship between price and quantity demanded. For instance, an elasticity of –0.4 for a cargo handling service indicates that a 10% increase in the price of the service would lead to a 4% reduction in its demand.
The demand for a port service is relatively elastic when a change in price leads to a proportionally greater change in the quantity demanded in the opposite direction (1 < ED < ∞). For instance, if the price increases by 10%, the quantity demanded falls by more than 10%. Conversely, demand is relatively inelastic when a change in price results in a proportionally smaller change in the quantity demanded in the opposite direction (0 < ED < 1). For example, if the price increases by 10%, the quantity demanded will decrease by less than 10%. At the extremes, demand is perfectly elastic when any change in price results in an unlimited change in the quantity of the port service demanded (ED = ∞). In contrast, demand is perfectly inelastic when a change in price leads to no change whatsoever in the quantity of the port service demanded (ED = 0).
The elasticity of the demand for a port service is of importance for the formulation of short-term and long-term strategies of the port and/or the port service provider, the adjustment of port service pricing policies, the determination of priorities in serving port users, and the design of the overall port policy.
The value of elasticity is shaped by a range of parameters, which can be grouped into two main categories. The first one is the characteristics of the port service. The impact of a price change on elasticity is greater (or smaller) depending on the extent to which the following factors are larger (or smaller): (a) the price of the service in relation to the total cost of the port product, (b) the cost of the service as a share of the total value of the transported good (a small share implying a limited effect), (c) the cost of the service as a percentage of the passenger’s total income, (d) the number of available substitutes (alternative transport modes), (e) the quality and price of alternative options, (f) the type of journey (in the case of passengers), (g) the contestability of the hinterland. By contrast, the demand for a port service is particularly inelastic when the hinterland served is extensive or fixed, or when, due to the integration of maritime transportation into broader multimodal transport networks, the service in question constitutes only one segment of the total set of services employed.
The second group of parmeters relates to the characteristics of the price change The impact of a price variation on elasticity is greater (or smaller) when: (a) the magnitude of the price change is larger (or smaller), (b) cumulative price changes occur, since each successive change influences a different users base, and (c) users’ perceptions of what stands as a “normal” and/or “fair” price.
The full effects of a price change in a port service often become evident only after a considerable period. Significant price changes tend to exhibit lower elasticity in the short term, as users continue to rely on essential services until viable alternatives emerge. Thus, a price increase may initially generate higher revenues, but these revenues gradually diminish, and, in the long run, the service provider may even experience a decline in total income. For this reason, it is useful to distinguish between short-term elasticity (i.e., less than two years) and long-term elasticity (i.e., more than ten years). A static approach to elasticity tends to underestimate both the revenue losses arising from price increases and the ability of users to adapt to changes over time. Static elasticities, therefore, often create a bias in favor of expanding infrastructure investments (e.g., increasing port capacity), since they undervalue the existence of alternative options available to users.
Empirical studies in the major container ports of the Le Havre–Hamburg range in Northern Europe have recorded a significant variation in the elasticity of cargo volumes concerning a specific change in cargo-handling charges.
For an accurate understanding of the impact of a significant change in the income of the economy served by a port, the analysis must also consider the type of cargo handled. Each cargo category has its own income elasticity of demand, and these differences can be decisive in shaping demand for port services related to the transportation of specific goods. Even within a single market segment—for example, containerized cargo—the content of the “box” determines the income elasticity of demand for container-handling services as well as for the complementary services offered at the port. The same applies to liquid bulk cargo: both the nature of the cargo and its destination determine the extent to which demand for the relevant port services will change.
Like cargoes, port users do not constitute a homogeneous group. They include shipping companies, cargo owners, and a range of intermediaries who provide essential services for the completion of the maritime transport process and the delivery of cargo to its destination. Preferences and requirements vary among these groups. Consequently, their respective demand elasticities also differ.
B. Cross-Elasticity of Demand for Port Services
Cross-elasticity refers to the degree of responsiveness of demand for port service X to a change in the price of port service Y:
ΕDXY = (Δqx/ qx) / (Δpy / py)
Where:
- ΕDXY = Cross-elasticity of demand
- qx = Quantity demanded of port service X
- Δqx = Change in the quantity demanded of port service X
- py= Price of port service Y
- Δpy = Change in the price of port service Y
Cross-elasticity is determined by the relationship between the services in question—that is, whether they are complementary, substitute, or independent of each other:
- Complementary services: Cross-elasticity is negative, since demand for both services decreases simultaneously (ΕDXY < 0). An example of complementary services in a port is towing and cargo handling.
- Substitute services: Cross-elasticity is positive, since demand for service X increases when the price of service Y rises (ΕDXY > 0). Two terminals serving the same port market (e.g., general cargo) constitute an example of substitutes. However, due to the increasing specialization observed in maritime transport, the degree of substitutability between terminals varies—or may even be limited—depending on the case.
- Independent services: Cross-elasticity is zero, since demand for service X does not change when the price of service Y increases (ΕDXY = 0).