Procurement of transportation services in spot markets under a double-auction scheme with elastic demand

Abstract

In the recent years, new electronic procurement technologies have been successfully implemented in freight transportation marketplaces. This new type of trading between freight transportation agents requires new analytical tools to better understand the consequences of different strategies and forms of transportation capacity allocation. I studied two cases. First, a transportation market where an O–D pair is operated round-trip by multiple carriers, providing service to multiple shippers. Second, a multiple O–D pairs’ market, operated by multiple carriers, providing service to multiple shippers. In both cases the shippers’ demand function is elastic to the transportation service prices. The shippers contract each shipment to a single carrier following an open auction, in which the shipper selects the carrier based on the best bidding price. Carriers contracted to serve the shipments will often make empty movements to reposition their equipment. Hence, they will attempt to “generate” demand for these empty trips, in order to obtain revenue for their spare capacity. Carriers may generate demand for this capacity by offering service substantially below the market price (as low as the marginal cost of shipping). Shippers on the other hand, decide when to buy transportation services (and how much), i.e., the frequency of shipment and lot size, based on a strategy to minimize the total inventory and transportation costs. A significant reduction in the transportation tariff triggers an adjustment in the replenishment pattern of shippers, as a response to the beneficial market conditions. The new generated demand transforms shippers into bidders for the available spare capacity at discounted prices. This double-auction scheme allocates shipments to the otherwise unused capacity thus reducing the network’s empty movements, which also reduces the average transportation cost in the network. In this paper, I show that under an EOQ policy an average discount spot price of two thirds of the market price will trigger a demand generation for transportation services in the shippers’ pool. The paper presents a numerical application of the derived model, in which the double-auction scheme reduces the network average transportation tariff by at least 14%.