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Price and Frequency Competition in Freight Transportation

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  • Shah, Nilopa
  • Brueckner, Jan K.

Abstract

This paper develops a simple analytical model of price and frequency competitionamong freight carriers. In the model, the full price faced by a shipper (a goodsproducer) includes the actual shipping price plus an inventory holding cost, whichis inversely proportional to the frequency of shipments offered by the freight carrier. Taking brand loyalty on the part of shippers into account, competing freightcarriers maximize profit by setting prices, frequencies and vehicle carrying capacities. Assuming tractable functional forms, long- and short-run comparative-staticresults are derived to show how the choice variables are affected by the model’sparameters. The paper also provides an efficiency analysis, comparing the equilibrium to the social optimum, and it attempts to explain the phenomenon of excesscapacity in the freight industry.

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Bibliographic Info

Paper provided by University of California Transportation Center in its series University of California Transportation Center, Working Papers with number qt1n42k26q.

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Date of creation: 01 Sep 2011
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Handle: RePEc:cdl:uctcwp:qt1n42k26q

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Keywords: Social and Behavioral Sciences;

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References

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  1. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, INFORMS, vol. 53(2), pages 241-259, February.
  2. Hubbard, Thomas N, 2001. "Contractual Form and Market Thickness in Trucking," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 32(2), pages 369-86, Summer.
  3. De Vany, Arthur S & Saving, Thomas R, 1983. "The Economics of Quality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(6), pages 979-1000, December.
  4. Jan Brueckner & Ricardo Flores-Fillol, 2007. "Airline Schedule Competition," Review of Industrial Organization, Springer, Springer, vol. 30(3), pages 161-177, May.
  5. Brueckner, Jan K., 2002. "Network Structure and Airline Scheduling," Working Papers, University of Illinois at Urbana-Champaign, College of Business 02-0112, University of Illinois at Urbana-Champaign, College of Business.
  6. Thomas N. Hubbard, 1999. "How Wide is the Scope of Hold-Up-Based Theories? Contractual Form and Market Thickness in Trucking," NBER Working Papers, National Bureau of Economic Research, Inc 7347, National Bureau of Economic Research, Inc.
  7. Noah Gans, 2002. "Customer Loyalty and Supplier Quality Competition," Management Science, INFORMS, INFORMS, vol. 48(2), pages 207-221, February.
  8. Martin, Robert E, 1981. "Stochastic Input Deliveries," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 19(4), pages 640-49, October.
  9. De Vany, Arthur & Frey, Gail, 1982. "Backlogs and the Value of Excess Capacity in the Steel Industry," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 441-51, June.
  10. Jan K. Brueckner, 2010. "Schedule Competition Revisited," Journal of Transport Economics and Policy, London School of Economics and University of Bath, London School of Economics and University of Bath, vol. 44(3), pages 261-285, September.
  11. Gérard P. Cachon & Fuqiang Zhang, 2006. "Procuring Fast Delivery: Sole Sourcing with Information Asymmetry," Management Science, INFORMS, INFORMS, vol. 52(6), pages 881-896, June.
  12. De Vany, Arthur S & Saving, Thomas R, 1977. "Product Quality, Uncertainty, and Regulation: The Trucking Industry," American Economic Review, American Economic Association, American Economic Association, vol. 67(4), pages 583-94, September.
  13. Koenigsberg, Ernest, 1980. "Uncertainty, Capacity, and Market Share in Oligopoly: A Stochastic Theory of Product Quality," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 53(2), pages 151-64, April.
  14. Minner, Stefan, 2003. "Multiple-supplier inventory models in supply chain management: A review," International Journal of Production Economics, Elsevier, Elsevier, vol. 81(1), pages 265-279, January.
  15. De Vany, Arthur S, 1976. "Uncertainty, Waiting Time, and Capacity Utilization: A Stochastic Theory of Product Quality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(3), pages 523-41, June.
  16. Albert Y. Ha & Lode Li & Shu-Ming Ng, 2003. "Price and Delivery Logistics Competition in a Supply Chain," Management Science, INFORMS, INFORMS, vol. 49(9), pages 1139-1153, September.
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Citations

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Cited by:
  1. Jan K. Brueckner & Dan Luo, 2013. "Measuring Strategic Firm Interaction in Product-Quality Choices: The Case of Airline Flight Frequency," CESifo Working Paper Series, CESifo Group Munich 4066, CESifo Group Munich.
  2. Lakew, Paulos Ashebir, 2014. "Economies of traffic density and scale in the integrated air cargo industry: The cost structures of FedEx Express and UPS Airlines," Journal of Air Transport Management, Elsevier, Elsevier, vol. 35(C), pages 29-38.
  3. Abate, Megersa & de Jong, Gerard, 2014. "The optimal shipment size and truck size choice – The allocation of trucks across hauls," Transportation Research Part A: Policy and Practice, Elsevier, Elsevier, vol. 59(C), pages 262-277.

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