Profit maximizing coalitions with shared capacities in distribution networks

We study the distribution network structure of multiple firms in the context of demand sensitivity to market offers. The problem consists in determining the profitability of horizontal collaboration between firms in a collaborative distribution schema. It considers the case of a set of regional distribution centers (DCs) where each DC is initially dedicated solely to one firm’s distribution activities and studies when it is beneficial that the DC owners collaborate through sharing their storage-throughput capacity. Such strategic decisions are made in order to improve the distribution capabilities of firms in terms of response time and cost-efficiency compared to the stand-alone situation. The problem is modeled as a coalition formation game in a cooperative framework, and we propose a collaborative distribution game with profit maximization. Three sharing mechanisms are modeled and tested: egalitarian allocation, proportional allocation, and Shapley value. The collaboration decision conditions for a given firm are analytically derived according to the sharing method considered and used to enhance the solution approach. Our numerical results clearly highlight the impact of this innovative collaboration opportunity on the firms’ performance in terms of distribution cost savings and revenue increases. An observed behavior is that the formation of several sub-coalitions prevails over the formation of a grand coalition, and that different cost sharing methods can lead to different sub-coalitions. We also provide managerial insights on the appropriate size of a coalition in various business instances tested, and on the key drivers that foster horizontal collaborative behavior among firms.