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Shipping to Heterogeneous Customers with Competing Carriers

Author

Listed:
  • Tao Lu

    (Department of Technology and Operations Management, Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, Netherlands;)

  • Ying-Ju Chen

    (Departments of ISOM and IEDA, HKUST Business School and School of Engineering, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong;)

  • Jan C. Fransoo

    (Kühne Logistics University, 20457 Hamburg, Germany;)

  • Chung-Yee Lee

    (IEDA, School of Engineering, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong)

Abstract

Problem definition: We study a shipper transporting and selling a short life-cycle product to a destination market via two competing transportation service providers (i.e., carriers). The two carriers offer distinct speeds and competing freight rates, whereas customers in the destination market obtain higher utility if they receive the product earlier and their time preferences are heterogeneous. Academic/practical relevance: Perishable products are commonly shipped via multiple means of transport. The faster the mode of transport, the more expensive it is, but speed enables the product to reach the market with higher quality. In addition to the trade-off between speed and cost, the competition between carriers can also influence the shipper's transportation procurement strategies. Our model highlights the implications of carrier competition in a dual sourcing problem. Methodology: We analyze a two-stage game in which carriers first compete on freight rates, and then the shipper determines the shipping quantities. Results: We show that the shipper may benefit from product differentiation via dual-mode shipping, in which the shipment that arrives earlier is sold at a premium price. In equilibrium, the shipper's profit can be U-shaped in the speed difference between carriers. Dual sourcing may be inferior to simply restricting a single shipping service in a winner-take-all fashion. Managerial implications: This study reveals an underlying trade-off between the operational advantage from product differentiation and the cost advantage from carrier competition. To benefit from either of these advantages, a shipper should use two carriers with either very distinct or very similar speeds. Single sourcing may bring an additional cost advantage that outweighs the value of production differentiation through dual sourcing.

Suggested Citation

  • Tao Lu & Ying-Ju Chen & Jan C. Fransoo & Chung-Yee Lee, 2020. "Shipping to Heterogeneous Customers with Competing Carriers," Manufacturing & Service Operations Management, INFORMS, vol. 22(4), pages 850-867, July.
    • Handle: RePEc:inm:ormsom:v:22:y:2020:i:4:p:850-867
    DOI: 10.1287/msom.2019.0776
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    References listed on IDEAS

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    2. Xu, Yuqiu & Wang, Jia & Cao, Kaiying, 2023. "Logistics mode strategy of firms selling fresh products on e-commerce platforms with private brand introduction," Journal of Retailing and Consumer Services, Elsevier, vol. 73(C).
    3. Zheng, Wei & Li, Bo & Song, Dongping, 2022. "The optimal green strategies for competitive ocean carriers under potential regulation," European Journal of Operational Research, Elsevier, vol. 303(2), pages 840-856.
    4. Cao, Kaiying & Xu, Yuqiu & Hua, Ye & Choi, Tsan-Ming, 2023. "Supplier or co-optor: Optimal channel and logistics selection problems on retail platforms," European Journal of Operational Research, Elsevier, vol. 311(3), pages 971-988.

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