Choosing a transport contract over multiple periods

Brusset, Xavier (2009): Choosing a transport contract over multiple periods. Published in: International Journal Logistics Systems and Management , Vol. 5, No. 2-3 (February 2009): pp. 273-322.

Abstract

We offer a shipper and a carrier the choice among three contracts in which to frame their relationship. Both can also take recourse in the transport spot market. Demand and price on the spot market are dependent exogenous stochastic processes. We model the outcome of this endogenous choice of contract. The results, given in closed form, are different from those presented in the literature. Using numeric instances, we show how a choice is made and which contract would be preferred. Comparison on the variance of the economic returns are offered. The conclusions are applicable when the carrier is not capacity constrained.

• Item Type: MPRA Paper
• Language: English
• Keywords: transport; stochastic process; MPC; minimum purchase commitment; quantity flexibility; relational contract
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

References

Baker, G., Gibbons, R. and Murphy, K. (2001) ‘Bringing the market inside the firm?’, American Economic Review, Vol. 91, No. 2, pp.212–218.

Baker, G., Gibbons, R. and Murphy, K. (2002) ‘Relational contracts and the theory of the firm’, Quarterly Journal of Economics, Vol. 117, No. 1, pp.39–83.

Brusset, X. and Temme, N.M. (2005) ‘Supply chain management – european perspectives’, Impact of Information and Coordination on Transport Procurement, 1st ed., Chap. 12, Copenhagen Business School Press, Copenhagen, Denmark, pp.239–261.

Cachon, G. and Lariviere, M. (2001) ‘Contracting to assure supply: how to share demand forecasts in a supply chain’, Management Science, Vol. 47, No. 5, pp.629–646.

Chen, F. (2004) ‘Information sharing and supply chain coordination’, in de Kok, T. and Graves, S. (Eds.): Handbooks in Operations Research and Management Science: Supply Chain Management, Vol. 11, Chap. 7, Elsevier, pp.341–421.

Corbett, C., Zhou, D. and Tang, C. (2004) ‘Designing supply contracts: a contract type and information asymmetry’, Management Science, Vol. 50, No. 4, pp.550–559.

Jackson, M.O. and Wilkie, S. (2005) ‘Endogenous games and mechanisms: side payments among players’, Review of Economic Studies, Vol. 72, pp.543–566.

Kleindorfer, P.R. and Wu, D.J. (2003) ‘Integrating long- and short-term contracting via business-to-business exchanges for capital-intensive industries’, Management Science, Vol. 49, No. 11, pp.1597–1615.

Knemeyer, A.M., Corsi, T. and Murphy, P.R. (2003) ‘Logistics outsourcing relationships: customer perspectives’, Journal of Business Logistics, Vol. 24, No. 1, pp.77–109.

Laffont, J.J. and Tirole, J. (1993) A Theory of Incentives in Procurement and Regulation, MIT Press, Cambridge, MA, pp.82–83.

Lagunoff, R. (1992) ‘Fully endogenous mechanism selection: an essay on endogenous institutional choice’, Economic Theory, Vol. 2, No. 4, pp.465–480, available at http://ideas.repec.org/a/spr/joecth/v2y1992i4p465-80.html

Lariviere, M. (1999) ‘Supply chain contracting and coordination with stochastic demand’, in Tayur, S., Ganeshan, R. and Magazine, M. (Eds.): Quantitative Models for Supply Chain Management, Chap. 8, Kluwer Academic, Dordrecht, Holland, pp.234–267.

Lovejoy, W.S. (2006) ‘Optimal mechanisms with finite agent types’, Management Science, Vol. 52, No. 5, pp.788–803.

Macauley, S. (1963) ‘Non-conctractual relations in business’, American Sociological Review, Vol. 28, No. 1, pp.55–67.

Choosing a transport contract over multiple periods 297 Martínez-de-Albéniz, V. and Simchi-Levi, D. (2005) ‘A portfolio approach to procurement contracts’, Production and Operations Management, Vol. 14, No. 1, pp.90–114.

Myerson, R.B. (1979) ‘Incentive compatibility and the bargaining problem’, Econometrica, Vol. 47, No. 1, pp.61–73. Özalp, O. and Wei, W. (2006) ‘Strategic commitment for optimal capacity decision under asymmetric forecast information’, Management Science, Vol. 52, No. 8, pp.1238–1257.

Plambeck, E.L. and Taylor, T.A. (2005) ‘Sell the plant? The impact of contract manufacturing on innovation, capacity, and profitability’, Management Science, Vol. 51, No. 1, pp.133–150.

Plambeck, E.L. and Taylor, T.A. (2007) ‘Supply chain relationships and contracts: the impact of repeated interaction on capacity investment and procurement’, Management Science, Vol. 53, No. 10, pp.1577–1593.

Reichheld, F.F. and Sasser Jr., W.E. (1993) ‘Loyalty-based management’, Harvard Business Review, Vol. 71, No. 2, pp.64–73.

Rubinstein, A. (1982) ‘Perfect equilibrium in a bargaining model’, Econometrica, Vol. 54, pp.97–109.

Salanié, B. (1997) The Economics of Contracts: A Primer, 1st ed., MIT Press, Cambridge, MA, pp.97–116.

Seifert, R., Thonemann, U. and Hausman, W. (2004) ‘Optimal procurement strategies for online spot markets’, European Journal of Operational Research, Vol. 152, No. 3, p.781–799.

Spinler, S. and Huchzermeier, A. (2006) ‘The valuation of options on capacity with cost and demand uncertainty’, European Journal of Operational Research, Vol. 171, No. 3, pp.915–934.

Tomlin, B. (2003) ‘Capacity investments in supply chains: sharing the gain rather than sharing the pain’, Manufacturing and Service Operations Management, Vol. 5, No. 4, pp.317–333.

Tsay, A. (1999) ‘Quantity flexibility contract and supplier-customer incentives’, Management Science, Vol. 45, No. 10, pp.1339–1358.

Tsay, A. and Lovejoy, W. (1999) ‘Quantity flexibility contracts and supply chain performance’, Manufacturing and Service Operations Management, Vol. 1, No. 2, pp.89–111.

Tsay, A., Nahmias, S. and Agrawal, N. (1999) ‘Quantitative models for supply chain management’, International Series in Operations Research and Management Science, 1st ed., Chap. 10, Modeling Supply Chain Contracts: A Review, Kluwer Academic, pp.299–336.

Wu, D.J. and Kleindorfer, P. (2003) ‘Competitive options, supply contracting and electronic markets’, Management Science, Vol. 51, No. 3, pp.452–466.

Wu, D.J., Kleindorfer, P.R. and Zhang, J.E. (2001) ‘Optimal bidding and contracting strategies in the deregulated electric power marketplace: Part II’, in Sprague Jr., R.H. (Ed.): Proceedings of the 34th Annual Hawaii International Conference on Systems Sciences, IEEE Computer Society Press, Los Alamitos, California, USA, pp.2033–2043.

Wu, D.J., Kleindorfer, P.R. and Zhang, J.E. (2002) ‘Optimal bidding and contracting strategies for capital-intensive goods’, European Journal of Operational Research, Vol. 137, No. 3, pp.657–676.

Wu, D.J., Kleindorfer, P.R. and Sun, Y. (2005) ‘Optimal capacity expansion in the presence of capacity options’, Decision Support Systems, Vol. 40, Nos. 3–4, pp.553–561.