Speaker: Anne Lange, University of Luxembourg, Frankfurt UAS from October)  

Title: Contracting strategies for price competing firms under demand uncertainty

Authors: You Wu, Anne Lange, Benny Mantin

Abstract
Capacity-constrained asset providers often compete over prices when they trade their transport capacities with logistics service providers (LSPs) via spot markets. Prior to entering the spot market, the asset providers and the LSPs face demand uncertainty. To circumvent this uncertainty, an asset provider and an LSP may negotiate a contract to secure sales to the asset provider and capacity to the LSP. Contracting too many units may be beneficial (resp., detrimental) to the asset provider (resp., LSP) when realized demand is low, whereas contracting too few units may be beneficial (resp., detrimental) to the asset provider (resp., LSP) when realized demand is high. In determining the amount to contract, the agents need to anticipate the asset providers' pricing strategies in the spot market. We study this setting via a two-stage game theoretical model. In the first stage, the negotiation process is modeled as a bilateral Nash bargaining game between an asset provider and an LSP. In the second stage, after demand is realized, residual demand and capacity are traded via the spot market. In the spot market, when realized demand is sufficiently low (resp., high), the asset providers shall adopt a pure pricing strategy corresponding to the marginal price (resp., the market clearance price). For intermediate demand levels, they should practice mixed pricing strategies. In anticipation of these pricing strategies, we characterize the Nash bargaining outcomes.

We guide asset providers and LSPs in their contract negotiation: as the potential market size increases they should agree to a higher price per unit of capacity, and as the margin the LSP charges to the clients increases, they should contract fewer units. Such negotiations are deemed to fail if both the potential market and the LSP’s margin are sufficiently high. Further, we guide asset providers in their pricing strategies in the spot market.

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Organisers: Sanne Wøhlk and Marcel Turkensteen