An Experimental Economics Investigation of Shipper-carrier Interactions on the Choice of Mode and Shipment Size in Freight Transport



An Experimental Economics Investigation of Shipper-carrier Interactions on the Choice of Mode and Shipment Size in Freight Transport

Authors

J Holguín-Veras, N Xu, Rensselaer Polytechnic Institute, US; G de Jong, ITS University of Leeds, UK and Significance, NL; H Maurer, ITS University of Leeds, UK

Description

Experiments (experimental economics) on the interaction between shippers and carriers have been carried out to investigate decision-making on mode and shipment size in freight transport

Abstract

In decision-making on freight transport, several actors play a role, including shippers and carriers. This is one of the major differences with passenger transport, where most decisions (e.g. on modes) are made by a single traveller. These interactions are at the core of key decision-making processes pertaining to freight transport.

In the case of shipper-carrier interactions there is ample econometric evidence that indicates that the interactions between shippers and carriers determine mode choice. This seems to be the result of the interactions by which shippers, after experimenting with various shipment sizes and receiving input (e.g., prices, level of service, damage rates) from the carriers, finally settle down on a given shipment size, as discussed in Holguín-Veras (2002). The econometric evidence suggests that the shipment size choice, in essence, determines mode/vehicle choice.

However, this econometric evidence, though compelling is not yet enough to prove the existence of a causal relationship between shipper?s decisions about shipment size and carrier?s mode choice decision. This paper provides insight into this issue by means of economic experiments. Data for testing the theory and for gaining insights about real decisions can be obtained by experimental economics where respondents will be playing shippers and carriers. In freight transport analysis, there are very few applications of experimental economics (de Jong, 2005). An example of an application is Holguín-Veras and Thorson (2003).

The paper will describe the design, conduct and outcomes of an experiment carrried out both at the Rensselaer Polytechnic Institute in the US and the Institute for Transport Studies of the University of Leeds.

The objective of the experiment is to learn about interactions in the choice of mode and shipment size in freight transport between shippers as sender of goods and carriers as providers of transport services. In the initial set-up of the experiment with one shipper and several competing carriers, first the shipper decides on the number of deliveries in a week, which determines shipment size. To achieve this, the shipper minimises the sum of inventory cost (at the producing end) and the price paid for transport services of the carrier.

Given the shipper?s choice on shipment size, each of the carriers then chooses a transport chain (characterised by the number of legs and mode/vehicle type for every leg), by minimising transport costs. The carrier then quotes a price for this shipment and the shipper selects a carrier. This is repeated for several rounds. Initially the shipper will choose relatively small shipment sizes (to keep inventory costs down) for which the transport costs per tonne will be high. The shipper has incomplete and uncertain information about the transport costs and has to learn about this from the offers of the carriers. In this situation the total logistics costs (including inventory and transport cost) will not be minimised, because the shipper only gets the transport cost information through the carrier. The experiment will show whether shipper-carrier interaction will lead to an overall optimum (and if so under which conditions) or whether the sub-optimality (too small shipments, a too high frequency) will be persistent.

Several set-ups for the experiment will be tested including experiments with a given market shipping rate, experiments where each carrier can choose from several modes and experiments where each carrier uses one particular mode.

The experiments will be piloted in January/February 2007 with Masters students, PhD students and University staff representing the shipper and the carriers. Each of the carriers has access to a PC with MS Excel to carry out calculations to prepare for their offer. The shipper can equally use a PC with MS Excel to assist in the determination of the number of deliveries. The cost functions of the shipper and the carriers will also be presented on these PCs. The outcomes of the experiments will be analysed and reported in the paper.

Holguín-Veras, J. (2002). Revealed preference analysis of the commercial vehicle choice process. Journal of Transportation Engineering, American Society of Civil Engineers 128(4): pp. 336-346.

Holguín-Veras, J. and E. Thorson (2003) The role of experimental economics in freight transportation research: preliminary results of experimentation. Paper presented at the 2003 European Transport Conference, Strasbourg.

Jong, G.C. de (2005) Experimental economics, transport and logistics. Paper presented at the 2005 European Transport Conference, Strasbourg.

Publisher

Association for European Transport