Short-term or long-term contracts? This is a question that constantly challenges asset providers as well as logistics service providers. Addressing this challenge, Ms. You Wu’s paper “Contracting strategies for price competing firms under uncertainty” comes to the rescue. The excellence of this paper has been well-recognised and recently it was awarded the Best Student Paper of the European Aviation Economics and Management Prize in the 9th European Aviation Conference. Ms. Wu is a doctoral researcher within the Luxembourg Centre for Logistics and Supply Chain Management (LCL).
The paper, co-authored with Prof. Anne Lange and LCL director Prof. Benny Mantin, considers competing asset providers trading with logistics service providers (LSPs). Often, asset providers contract directly with LSPs ahead of the spot market to sell some capacity in advance. This can secure early sales but may be at a lower price. Such contracts remove asset providers’ supply from the spot market as well as LSPs’ demand. To obtain insights of the trade-off, the researchers first study how asset providers shall compete in the spot markets for demand from LSPs given their respective capacities and the realised demand. Secondly, the researchers study optimal contracts between an asset provider and an LSP in such competitive environments.
By modelling this negotiation as a bilateral Nash bargaining process, they characterize the contract terms based on demand characteristics and the margins that LSPs charge to their customers.