Contracting in Ocean Shipping Market Under Asymmetric Information

Abstract

In this paper, we not only develop a Stackelberg game to capture the unique characteristics of the ocean freight transportation, but also employ a screening model to address the contracting issue between one carrier and one freight forwarder under asymmetric information. The freight forwarder faces random demand from multiple shippers. In our framework, the spot price is positively correlated with the shippers’ demand. We first derive the forwarder’s optimal strategy, and then formulate the carrier’s contract design problem under symmetric and asymmetric information. Subsequently, we fully characterize the equilibrium parameters for a two-part tariff contract. The numerical experiments conducted thereafter reveal that (i) under a higher correlation between the shippers’ demand and the spot price, the carrier prefers a lower purchase price and the forwarder orders more through a contract in the peak seasons; (ii) when the market demand is extremely volatile, the carrier should raise the purchase price and the forwarder should order more through a contract; and (iii) with a higher degree of information asymmetry, the carrier prefers a higher purchase price while the forwarder relies more on the spot market than the contract market.