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Lixian Fan, Xinlu Li, Sijie Zhang and Zimeng Zhang

With increasing trends in globalization and international trade, the demand for transportation of goods by sea has been growing at an unprecedented rate. This has motivated the industries to build more vessels of greater size and better efficiency, which will enable the shipping industry to provide transport services at lower cost. Notwithstanding the importance of shipping market study in investment decision making, there are relatively few empirical studies modeling the dynamics between shipping demand and fleet supply by considering the incremental trend in vessel size. This chapter examines the nature of the shipping market and then provides a simultaneous model of ship orders, earnings and capacity decisions, and tests it using data. The primary findings point to the impact of vessel size on new investment and fleet development; and order book volume is a significant factor for capacity development which could lead to overcapacity in the market if not well organized.