Efficiency Loss and Coordination in the Online Shopping Supply Chain with Competitive Shipping Companies

Abstract

This paper studies efficiency loss and coordination mechanism in a supply chain with one online retailer and multiple competitive shipping companies in the presence of congestion effects. We build a three-level game between customers, shipping companies and the retailer. The equilibrium market structure is determined. The optimal volume–investment ratio for each shipping company is the same for both centralized and decentralized supply chains, and it is dependent on the delivery time function, independent of competitors’ decisions. The efficiency loss of the decentralized supply chain with one retailer and one shipping company is found to be 1/4, independent of the delivery time function and the demand function. The loss is reduced when competition is introduced into shipping companies and an upper bound of efficiency loss with multiple homogeneous shipping companies is derived. Revenue-sharing contracts may be designed to allow the decentralized supply chain to perform as well as a centralized one. The necessity of coordination is reduced when competition is introduced and the number of competitive companies increases. Finally, we extend the model to consider heterogeneous shipping companies and find that the disparity between shipping companies increases the efficiency loss because in the decentralized supply chain less efficient shipping companies also provide service. This research explicates the relationship options between e-commerce retailers and shipping companies, providing managerial insights for industry practitioners.