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A novel floating price contract for the ocean freight industry

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  • Ruina Yang
  • Xiaochen Gao
  • Chung-Yee Lee

Abstract

In this article, we investigate the carrier–shipper contracting issue arising from the ocean freight industry. In current practice, the carrier may sign a contract with the shipper stating a fixed price per container for the whole year, which is comprised of a low-demand season followed by a high-demand season. By accepting the contract, the shipper agrees to comply with the obligation of transporting the exact number of containers needed in both the low and high seasons at the contracted price. However, often the shipper will default on the committed quantity in the low season when the spot market price drops below the contract price. To address this problem, we propose a floating price contract. In the article, we characterize the optimal contract parameters and the shipper's optimal strategy and evaluate the effectiveness of the floating price contract with a combination of analytical and numerical methods. We find that under a broad class of macroeconomic market conditions, the floating price contract not only enables the carrier to tackle contract default issue more effectively while better enjoying the benefit of capacity planning but makes the shipper better off than relying solely on the spot market.

Suggested Citation

  • Ruina Yang & Xiaochen Gao & Chung-Yee Lee, 2017. "A novel floating price contract for the ocean freight industry," IISE Transactions, Taylor & Francis Journals, vol. 49(2), pages 194-208, February.
    • Handle: RePEc:taf:uiiexx:v:49:y:2017:i:2:p:194-208
    DOI: 10.1080/0740817X.2016.1215610
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    Cited by:

    1. Sun, Xuting & Chung, Sai-Ho & Choi, Tsan-Ming & Sheu, Jiuh-Biing & Ma, Hoi Lam, 2020. "Combating lead-time uncertainty in global supply chain's shipment-assignment: Is it wise to be risk-averse?," Transportation Research Part B: Methodological, Elsevier, vol. 138(C), pages 406-434.
    2. Wang, Kelly Yujie & Wen, Yuan & Yip, Tsz Leung & Fan, Zuojun, 2021. "Carrier-shipper risk management and coordination in the presence of spot freight market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 149(C).
    3. Yang, Ruina & Yu, Mingzhu & Lee, Chung-Yee & Du, Yuquan, 2021. "Contracting in ocean transportation with empty container repositioning under asymmetric information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).

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