An Analysis of Foreclosure Effects and Public Policy Remedies in Last-Mile Transportation

Abstract

We examine how Amazon’s decision to vertically integrate its retail platform and last mile delivery operations can lead to foreclosure in the last-mile transportation industry (as reflected in the deterioration of operating costs in the industry) as well as generate negative externalities (as reflected in decreases in the industry’s environmental performance). We also expand on public policy measures that can ameliorate these effects. Based on an operational analysis of one of the largest last-mile transportation firms in the United States, we find that Amazon’s decision to vertically integrate led approximately to a 45 percent increase in the mileage necessary to deliver parcels across the country. Furthermore, we find that this increase was more pronounced in areas of the country that are harder reach or that require faster deliveries. These effects translate, on average, into $0.69 in additional costs necessary to cover extra vehicular and labor expenditures per parcel. In areas that are more difficult to serve (either because they are harder to reach or require faster deliveries) these additional costs are even greater, reaching up to $9.44 per parcel. These effects also carry with them negative environmental externalities. Our analysis suggests that for every parcel delivered, green-house-gas emissions increase on average by 0.25 kg, which, in turn, generate social costs in the order of $0.01 per parcel. Because at the root of these outcomes are interactions among multiple organizations with significant market power asymmetries, we conclude our paper with suggestions on how public policy can monitor these asymmetric interactions and ameliorate such outcomes.