Operating Capacity, Pricing and Supply Elasticity in Container Shipping Markets

ABSTRACT We investigate the channels through which changes in operating capacity influence freight rates in the container shipping market using a novel dataset to create an operating capacity index at the shipping‐route level. Our analysis reveals that when supply elasticity is low, an increase in operating capacity tends to drive freight rates upward, as the market faces constraints and cannot easily accommodate additional demand. Conversely, when supply elasticity is high, an increase in operating capacity generally leads to lower freight rates since additional capacity can be deployed to meet rising demand, preventing price surges. These findings suggest that shipping companies strategically adjust capacity based on market conditions to optimise profitability, shifting between price and quantity competition depending on route characteristics and supply elasticity.