Who canvasses for cargos? Incentive analysis and channel structure in a shipping supply chain

doi:10.1016/j.trb.2016.11.007

Transportation Research Part B: Methodological

Volume 97, March 2017, Pages 78-101

https://doi.org/10.1016/j.trb.2016.11.007 Get rights and content

Highlights

•
Investigate decisions of cargo canvassing and negotiation agent hiring in a shipping supply chain.
•
Win–win and lose–lose situations are identified and interpreted.
•
Optimal strategy is that OS company canvasses for cargos and there is no negotiation agent.
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Negotiation agent raises IS service price (OS company canvasses for cargos), and weakens monopolistic advantage (IS companies canvass for cargos).
•
Negotiation agent enhances double marginalization effect when OS company canvasses for cargos, while weakens it when IS companies canvass for cargos.

Abstract

Ocean shipping (OS) and inland shipping (IS) are vertically complementary services in the shipping supply chain. In practice, we have observed that both OS and IS companies canvass for cargos. In addition, we have observed that more and more IS companies are forming alliances to obtain a better price from the OS companies by hiring a negotiation agent. We solve the strategy matrix based on the following questions: “Who canvasses for cargos?” “Should a negotiation agent be hired?” We find that when an OS company canvasses for cargos, a negotiation agent can raise the IS service price; however, when IS companies canvass for cargos, a negotiation agent can weaken an OS company's monopolistic advantage. We show that there exists a win–win situation when an OS company canvasses for cargos without a negotiation agent and that this win–win situation is Pareto-optimal for all shipping supply chain parties. Interestingly, by comparing the equilibriums under optimal strategies and equilibrium strategies, we identify a lose–lose situation. That is, a classic Prisoner's Dilemma occurs when IS companies canvass for cargos and a negotiation agent is hired. We find that the shipping supply chain's overall profit and social welfare are maximized when an OS company canvasses for cargos and IS companies do not hire a negotiation agent.

Introduction

In maritime industry, it is common for ocean shipping (OS) companies to canvass for cargos. For example, the Maersk Group owns a subsidiary, DAMCO Logistic, that takes charge of its cargo canvassing business, and other OS companies do the same. Similarly, AMERICAN PRESIDENT LINES (APL) owns APL Logistic and CHINA COSCO SHIPPING CORPORATION LIMITED (COSCO) owns COSCO International Freight Co. Ltd. Both APL Logistic and COSCO International Freight Co. Ltd. canvass for cargos. Because OS and inland shipping (IS) services are complementary and contain generic elements (Bouchery et al., 2015), OS companies have to negotiate with IS companies to procure upstream IS services. This forms a vertical shipping service supply chain. Clearly, if an OS company canvasses for cargos, it can provide “one-stop” transportation services for its customers and enhance its competitiveness. In addition, according to the latest COSCO report, canvassing for cargos strengthens a company's relationship with its customers, improves the quality of service, and expands the total market demand size.¹

However, we have also observed that more and more IS companies canvass for cargos. For example, Chu Kong Shipping Enterprises (Holdings) Co. Ltd. (CKS), the largest IS company in the Pearl River Delta region of China, canvasses for cargos by providing joint IS and freight-forwarding services. Under an arrangement with CKS, customers pay for a one-stop service, leaving CKS to procure the downstream OS services and to form a shipping service supply chain. Similarly, Danser Group, whose network covers the inland waterways in Northwest Europe, is an independent logistical service provider. Danser canvasses for cargos and quotes prices for both IS and freight-forwarding services. According to Murphy and Daley (2001), an empirical study showed that more than 54.4% of respondents agree or strongly agree that the barriers between the international freight forwarders (IFFs), the carriers, and the logistics providers are disappearing, and more shipping companies are canvassing for cargos. In recent times, freight forwarders have been required to provide multiple logistic services (Murphy and Daley, 2001), then merger and acquisitions occur between freight forwarders and shipping companies to provide agile and flexible service and improve maritime logistics value (Bradley et al., 1999, Lee and Song, 2015).

Undoubtedly, canvassing for cargos can be beneficial for both OS and IS companies. For the latter, according to SINOTRANS & CSC HOLDINGS CO. LTD. (SINOTRANS & CSC), the largest IS company in China, canvassing for cargos helps combine the company with other business, thus providing an integrated logistics service.² IS companies actually have more incentives than OS companies to canvass for cargos. The possible driving forces for this are as follows: First, there are many more IS companies in the upstream IS market compared to the downstream OS market. According to the latest Rotterdam Port information report,³ there are 119 IS companies in the inland waterways around Rotterdam Port. They are competing fiercely with each other, resulting in low profit margins and a huge system efficiency loss. Second, IS companies help to increase their profit gains by buying and reselling OS services to their customers (as a new profit resource), especially when the OS service price is at an acceptable level.

In practice, there are other ways for IS companies to protect their profits. Forming an alliance is the most popular way. For example, the South China Common Feeder Alliance (SCCFA) comprises 30 IS companies in the Pearl River Delta region in South China. It covers 21 cities and 52 inland feeder ports and aims to enhance the relative negotiation power when it contracts with the monopolistic OS companies.⁴ The SCCFA has an office that acts as a negotiation agent for the IS companies and receives commissions under a predetermined revenue-sharing rate. Obviously, both advantages and disadvantages exist when IS companies hire a negotiation agent in the process of contracting with OS companies. On the one hand, hiring a negotiation agent reduces the intense competition in the IS market (McGuire and Staelin, 1983) and improves the negotiation position of the IS companies. On the other hand, a negotiation agent shares part of the profits of the IS companies, which increases the IS companies’ costs. Involving a negotiation agent also results in a decentralized supply chain because one more supply chain party is added, inducing system profit loss (McGuire and Staelin, 1983). In addition, all IS companies in the alliance receive the same wholesale price when they sell IS services or procure OS services. Therefore, the benefits of IS price increases and OS price reductions have to be shared with their competitors (i.e., companies in the alliance who are competing in the IS market), and this might reduce the IS companies’ incentives of joining an alliance. Thus, we raise the following research questions: (1) is it possible for a monopolistic OS company and competing IS companies to cooperate over incentives as to who should canvass for cargos? (2) Is it beneficial or not for IS companies to hire a negotiation agent and form an IS alliance? (3) What is the equilibrium channel structure in this two-to-one (two IS companies and one OS company) supply chain where the services of the IS and OS companies are complementary?

To answer the aforementioned questions, we propose two contrasting models: (1) the model with a negotiation agent and (2) the model without a negotiation agent. For each model, we consider the following two scenarios: a monopolistic OS company canvasses for cargos, and two competing IS companies canvass for cargos, respectively. Thus, there are four combinations: (1) A-OS, where the OS company canvasses for cargos, and the IS companies hire a negotiation agent; (2) NA-OS, where the OS company canvasses for cargos, and the IS companies do not hire a negotiation agent; (3) A-IS, where the IS companies canvass for cargos and also hire a negotiation agent; (4) NA-IS, where the IS companies canvass for cargos but do not hire a negotiation agent. Comparing these four combinations helps us study the incentives for cargo canvassing and negotiation agent hiring. We also derive the equilibrium channel structure to answer research question (3). We investigate the channel structure, which comprises two IS companies, one negotiation agent, and one monopolistic OS company. This investigation characterizes the more competitive IS market and the monopolistic OS market and facilitates our analytical study of the benefits of cargo canvassing and negotiation agent hiring. Our main findings are summarized as follows.

First, we identify the value of cargo canvassing for the IS companies and the OS company, respectively. When there is no negotiation agent helping the IS companies, we find that both the OS company and the IS companies have incentives to canvass for cargos when the upstream IS market competition is sufficiently intense. In contrast, when the IS companies hire a negotiation agent, we find that both the OS company and the IS companies prefer the other parties to canvass for cargos. For the IS companies, we find that the negotiation agent helps raise the IS service price when the OS company canvasses for cargos; however, the OS service price is not lowered when the IS companies canvass for cargos. Therefore, the IS companies benefit more when they sell IS services to the OS company but let the latter to canvass for cargos. Having said that, we further demonstrate that hiring a negotiation agent is an advisable strategy for the IS companies if they eventually do decide to canvass for cargos. The reason for this is that hiring a negotiation agent weakens the monopolistic advantage of the OS company, thus avoiding a possible OS price increase.

Second, we show that “with a negotiation agent” is a strictly less-preferred strategy for an OS company no matter who canvasses for cargos. We then conclude the value of a negotiation agent hiring as follows: (1) to weaken the competition between the IS companies, (2) to raise the IS service price when the OS company canvasses for cargos, and (3) to weaken the OS company's monopolistic advantage when the IS companies canvass for cargos.

Third, we identify the optimal strategies for both the OS company and the IS companies. We find that there exists a win–win situation, which is also the Pareto-optimal strategy for the supply chain parties. This situation happens when an OS company canvasses for cargos with no negotiation agent, provided there is sufficiently intense IS competition and a large revenue-sharing rate. In addition, our analysis of the optimal strategies and equilibrium strategies indicates that there also exists a classic Prisoner's Dilemma. This lose–lose situation occurs when IS companies canvass for cargos, and they hire a negotiation agent with a low revenue-sharing rate. One possible way to break this Prisoner's Dilemma is vertical cooperation. That is, the OS company canvasses for cargos, and the IS companies promise not to hire a negotiation agent. Then, a win–win situation exists.

Finally, we study the shipping supply chain's overall profit and find that when an OS company canvasses for cargos and the IS companies do not hire a negotiation agent, the supply chain's profit is maximized. Interestingly, we find that when there is a negotiation agent, the negotiation agent enhances the double marginalization effect when the OS company canvasses for cargos, whereas it weakens the double marginalization effect when the IS companies canvass for cargos. We also study social welfare and find that social welfare is maximized when the supply chain profit is maximized. Thus, the customer surplus and the supply chain profit are jointly improved. From the perspective of the government whose objective is to maximize social welfare, we show that OS companies should be encouraged to canvass for cargos and that the IS competition should be controlled within a moderate range.

The rest of the paper is organized as follows: Section 2 presents a review of the most relevant literature. The model settings, including the game structure and notations, are defined in Section 3. In Section 4, we investigate the companies’ incentives for cargo canvassing and the effects of negotiation agent hiring. We also discuss the optimal strategies for both the OS companies and the IS companies, based on which we derive the equilibrium channel structure. In Section 5, we investigate the supply chain's profit and optimal social welfare. We discuss the general demand model, the bargaining model, capacity constraint, and demand uncertainty in Section 6. Section 7 presents concluding remarks and possible directions for future research.

Section snippets

Related literature

Literature on co-opetition relationships in the maritime industry is closely related to our research. Lee and Song (2015) provide a comprehensive literature review on cooperation and competition in maritime operations. Among these studies, most of them focus on operational decisions, such as capacity investment (Luo et al., 2012), pricing decisions (Dowd and Fleming, 1994, Strandenes and Marlow, 2000), and storage space allocation (Yu and Qi, 2013). There are fewer studies focusing on strategic

Model formulations

In the section, we first consider a basic model with a bilateral monopoly setting to study the optimal strategies of cargo canvassing and negotiation agent hiring. Then, we consider a competition setting with a two-to-one supply chain structure with a downstream OS company like Maersk and two upstream IS companies like CKS. It is possible for all three of these companies to canvass for cargos if they have the incentive to do so. We use the following notations for easy reference:

base market

Values of cargo canvassing and negotiation agent hiring

We first present the equilibrium outcomes in Tables 3 and 4. To investigate the values of cargo canvassing and negotiation agent hiring, we ascertain the profit variation between each supply chain party with a different canvasser and then compare their profits with and without a negotiation agent. The comparison results are summarized in Propositions 2 and 3.

Supply chain's profit

Proposition 6

a comparison of the supply chain's profit yields the following:

(i)
${\hat{Π}}_{S C}^{N A - O S} > {\hat{Π}}_{S C}^{N A - I S} > {\hat{Π}}_{S C}^{A - O S} = {\hat{Π}}_{S C}^{A - I S}$

We observe the following findings: (1) when the IS companies hire a negotiation agent, the supply chain's profit is less than when there is no negotiation agent. (2) When the OS company canvasses for cargos and there is no negotiation agent, the supply chain's profit is larger. (3) When the IS companies hire a negotiation agent, the supply chain's profit is unchanged no matter who canvasses for

General demand model

Following Zhang et al. (2010) and Fu and Zhang (2010), we study a general demand model in which ${\hat{p}}_{i} ({\hat{q}}_{i}, {\hat{q}}_{j}) = a - \hat{k} {\hat{q}}_{i} - b {\hat{q}}_{j}, for i, j = 1, 2 and i \neq j .$ The market heterogeneity is captured by parameters $a, \hat{k}, and b$ , where $\hat{k}$ stands for the own demand sensitivity on price and where b stands for stands for the degree of intensity of the market competition. We are interested in whether or not our previous findings hold in this general demand setting.

Based on the equilibrium outcomes of four games under this

Conclusion

In the maritime shipping industry, it is possible for either OS or IS companies to canvass for cargos. They then provide a “one-stop” shipping service comprising upstream IS services and downstream OS services to their customers. In recent years, we have observed that an increasing number of IS companies are canvassing for cargos. This can add another profit resource for them (i.e., buying and reselling OS services), especially when the IS service market is full of competition. In contrast,

Acknowledgements

This project is founded by National Natural Science Foundation of China (NSFC) (Project number: 71431007). Fan Wang was supported by NSFC (71225004) and Baozhuang Niu was supported by NSFC (71571194, 71201175) and Excellent Young Teachers Program of Guangdong Universities and Colleges (YQ2015014).

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Who canvasses for cargos? Incentive analysis and channel structure in a shipping supply chain

Highlights

Abstract

Introduction

Section snippets

Related literature

Model formulations

Values of cargo canvassing and negotiation agent hiring

Supply chain's profit

General demand model

Conclusion

Acknowledgements

Transp. Res. Part B

Transp. Res. Part B

Transp. Res. Part E

Transp. Res. Part E

Eur. J. Oper. Res.

Transp. Res. Part B

Transp. Res. Part B

Transp. Res. Part E

Transp. Res. Part B

Transp. Res. Part B

Transp. Res. Part B

Transp. Res. Part B

Transp. Res. Part A

Eur. J. Oper. Res.

Transp. Res. Part B

A game theoretic analysis of competition among container port hubs: the case of Busan and Shanghai

Marit. Policy Manag.

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Pricing and replenishment strategies in a distribution system with competing retailers

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