A dynamic game model of strategic capacity investment in the cruise line industry

In this paper, the cruise line industry is characterized as an oligopoly where a finite number of cruise lines compete to maximize their profits over a fixed planning horizon. The oligopolistic competition is modeled as a N-person nonzero-sum noncooperative dynamic game. The noncooperative Nash equilibrium capacity investment strategies of cruise lines are theoretically analyzed under the open-loop information structure. The necessary conditions for an open-loop Nash equilibrium solution are derived using a Pontryagin-type maximum principle and the sufficient conditions are also established. The economic interpretation of the optimality conditions is given so as to demonstrate the difference between the static and dynamic oligopoly problems. The dynamic oligopolistic competition of three cruise lines in a hypothetical setting is also numerically analyzed by using the iterative algorithm. Numerical results provide a number of important managerial guidelines for cruise capacity investment decisions. The paper concludes with a discussion on future research directions.