Journal of Systems Science and Information
June, 2015, Vol. 3, No. 3, pp. 234–247
DOI: 10
.1515/JSSI-2015-0234
A Cooperative Mec h anism Between China Post and Private Express
Firm for Remote Area Express Market
Ling YANG
School of Management, University of Science and Technology of China, Hefei 230026,China
E-mail : yang0909@mail.ustc.edu.cn
Juzhi ZHANG
School of Management, University of Science and Technology of China, Hefei 230026,China
E-mail : zjuzhi@mail.ustc.edu.cn
Abstract Focusing on the universal express service market, this paper introduces a cooperative
mechanism between China Post and private express companies. To investigate whether this cooper-
ative mechanism works, the authors develop a pricing model for the express service market in three
different scenarios, i.e., China Post monopolizes the remote area market, competes with a private ex-
press company, and cooperatively provides service to the private company. Comparison between the
three different scenarios shows that the proposed cooperative mechanism will benefit both firms. The
authors also introduce a revenue sharing contract to coordinate the system, and investigate the optimal
regulation price.
Keywords express service; pricing model; revenue sharing contract; universal postal service; social
welfare
1 Introduction
In China, although the express industry has been developed greatly in main cities because
of the fast developing B2C e-commerce during the past decade, the express market from cities
to remote areas such as pastoral areas, islands, mountains, boarder and so on, is still underde-
veloped. Due to the low population density of these remote areas, an express delivery to these
areas implies a long distance and a high delivery cost, which prevent most private express firms
from entering this market. As a result, this market is currently monopolized by China Post.
China Post, as a national corporation that provides a basic express service for all residents
and enjoys corresponding government subsidies and tax breaks, is a large state-owned enterprise
supervised by the Chinese treasury department. In the support of fiscal fund, China Post has
established the express and transportation network covering all cities and counties (towns) of
31 provinces (autonomous regions and municipalities) nationwide. However, since poor traffic
conditions in remote areas and limited transportation capacity to respond express demand
nationwide, the quality of China Post’s basic express service from cities to remote areas is
unsatisfactory.
Received September 26, 2014, accepted October 22, 2014
A Cooperative Mechanism Between China post and Private Express Firm ... 235
In spite of the low quality service, this market cannot be ignored due to the following reasons.
Firstly, there are about 270 million of peasant workers. They work and live in main cities, but
leave their parents and/or kids living in these remote areas. Thus, they have a huge demand in
delivering various products to their families. Secondly, there are another 280 million of people
that became urban residents during the past 20 years. For those urban residents they still have
relatives or family members living in the remote areas. Thirdly, the latest report shows that
there are 178 million peasant Internet users in China, and they could be the potential B2C
consumers requiring the express service.
In view of the above facts, some research questions we are interested in include the following:
(i) How to improve the express service quality from cities to remote areas while not to increase
costs? (ii) How to combine the strengths of China Post and private express firms? (iii) How to
fully utilize social resources to get higher economic and social benefits?
In this paper, we propose a cooperation mechanism between China Post and private express
firms, under which private firms outsource “the last miles” to China Post. With this mechanism,
both the China Post’s advantage in its universal postal service network and the efficiency of
private firms in their intercity express could be fully utilized. To investigate whether this
cooperative mechanism works, we develop a pricing model for the mentioned express market in
three scenarios: (i) China Post monopolizes the remote area market; (ii) China Post competes
with a private express company without providing “the last mile” outsourcing service; and
(iii) China Post cooperatively provides the “last mile” service to the private express firm. We
derive the optimal decisions of the system members in the three different scenarios. Comparison
between them shows that the proposed cooperative mechanism provides Pareto improvement for
both China Post and the private express firm. Furthermore, we analyze the optimal decisions in
an integrated scenario and introduce a revenue sharing contract to coordinate the two members.
Previous literatures highly related our research are mainly on the problem of universal
postal service. For instance, Pindus et al.
[1]
constructed the social value system of the universal
postal service from eight perspectives, including consumer benefits, business benefits, safety
and security, environmental benefits, facility, information exchange, social linkages, and civic
pride. Pitia et al.
[2]
posed that the changing environment of the postal sector has increased
the urgency for governments to re-examine public postal administrations. Their study reveals
reforms of the Solomon Islands postal service have had some positive influence on the level
of customer satisfaction. Schuster
[3]
showed that privatization has led to a decrease in the
quality of the universal service by using a data set on privatization for 21 countries over the
period 1980–2007 for the postal sector. Donderl
[4]
studied a theoretical model assessing the
optimal access charges and retail prices in the postal sector. Chen
[5]
studied the impact of the
development of European postal regulation on universal service. Wang and Shen
[6]
summarized
the revelation of Japanese postal reform for improving the compensation mechanism of the
universal postal service in China. Wu and Yang
[7]
analyze the composition of universal postal
service cost from four processes namely collecting, processing, transporting and delivering.
Different from previous literatures, our research contributes the literatures in the following
ways. First, we provide a cooperation mechanism bringing a Pareto improvement for all par-
ticipants rather than be focused on the establishment of a “universal service fund”. Second, we
236 YANG L, ZHANG J Z.
investigate in the perspective of quality improvement of express service from cities to remote
areas that were not sufficiently considered in previous literatures. Third, we introduce welfare
function to investigate the government’s optimal decision based on social welfare maximization.
The remainder of this paper is organized as follows. Section 2 presents model development.
Results comparison between three different scenarios is presented in Section 3. In Section 4,
integrated system is considered and a revenue sharing contract is introduced. Then we discuss
the optimal regulation price based on overall welfare maximization in Section 5. We give
numerical analysis in section 6, and conclude our findings in Section 7.
2 Model Development
In this paper, we investigate the Niche market of express services from cities to remote
areas. The considered market consists of China Post and a private express firm. China Post,
as the designated operator of the universal postal union in China, is a national firm to provide
the universal postal service to all citizens and is enjoying the government’s subsidies and tax
breaks. The private express firm, on the other contrary, is running under the market rules. p
0
denotes the unit service price of China Post, and that of the private express firm is p
1
.We
assume that p
0
<p
1
because China Post has a mission to satisfy the communication needs of
all citizens. Also, we consider that p
0
is an exogenous variable formulated by government, and
p
1
is the private express firm’s decision variable. Although that the network of a private express
firm is spread mainly in cities and thus the private company may not cover all the country,
it could provide high quality services such as offering door to door pick up service and can
delivery the packet quickly. Also, it has few restrictions on the packaging, weight, dimensions,
and so on. Different from the private express, China Post’s service quality is poor because of
its low charges. It doesn’t provide pick-up and delivery service, and delivery time is much long.
Following the above reasons we assume the service quality of the private express firm (q
1
)is
higher than that of China Post (q
0
), i.e., q
0
<q
1
. In this paper we analyze three different
scenarios for the express market from cities to remote areas, and estimate the profits of the
market members to identify a win-win cooperative mechanism for China Post and the private
express firm.
As shown in Figure 1, in this first scenario, only China Post provides universal postal service
that from cities to remote areas. This scenario is the current situation of China express market.
The second scenario considers a possible future situation that the private company enters and
competes with China Post in such a market. Under this scenario, a consumer could delivery
his packet to a remote area via both China Post and the private express firm. The third one
is the cooperative mechanism we proposed, under which while the two firms competes in the
market, China Post cooperatively provides the “last mile” service for the private firm.
All the notations and their meanings of this paper are listed in Table 1.
We consider that consumers are heterogeneous in their preferences in the service quality.
Specifically, we assume that: (i) The whole market considered is normalized to 1; (ii) A con-
sumer’s utility in the service has a linear relationship to the service quality, i.e., u = v + θq
where the basic utility v>0 is a constant to all consumers and θq is the utility from the
quality; and (iii) the value of θ is different among consumers and follows a uniform distribution
A Cooperative Mechanism Between China post and Private Express Firm ... 237
U[0, 1]
[8,9]
.
For assumption (ii), a more complex model may allow v to vary across the consumers.
However, if the basic consumer utility follows uniform distribution, the new model is equivalent
to the current model with v being homogeneous
[10]
. For assumption (iii), empirical studies
suggest that consumers can be clustered into different market segments based on their service
requirements. In addition, the uniform distribution assumption follows a common practice
in prior economic literature that model consumer taste on quality (e.g., [11–13]). In these
studies, consumers are heterogeneous and the heterogeneous sensitivity parameter is uniformly
distributed. Thus, a consumer’s surplus in choosing the service of the two firms is s
i
= v+θq
i
−p
i
where i = 0 or 1.
Usually, a consumer will select the firm that maximizes his surplus. But if his surplus on
services of both the two firms are negative, i.e., s
i
< 0, i = 0 and 1, he will refuse both firms.
(a) Scenario 1: China Post monopolizes the remote area market
(b) Scenario 2: China Post competes with a private express company without
providing “the last mile” outsourcing service
(c) Scenario 3: China Post cooperatively provides the “last mile” service to the private
express firm
Figure 1 Three modes of express service
238 YANG L, ZHANG J Z.
Table 1 Notations
p
0
The service price of China Post, which is an exogenous variable set by the government
p
1
The service price of the private express firm
q
0
The quality level of China Post
q
1
The quality level of the private express firm
v The basic utility of delivery service
θ Customer preference level for different service delivery
s
0
A consumer’s surplus from the delivery service of China Post
s
1
A consumer’s surplus from the delivery service of the private express firm
π
0
The profit of China Post
π
1
The profit of the private express firm
b The government’s subsidies to China Post
c
0
The marginal cost of China Post
c
1
The marginal cost of the private express firm
D The market demand when China Post monopolizes the market (Scenario 1)
D
0
The market demand of China Post when the private express firm enters the market
(Scenario 2 and 3)
D
1
The market demand of the private express firm when he enters the market
(Scenario 2 and 3)
In detail, for the first scenario, consumers can purchase the express service just from China
Post, under which his surplus is s
o
= v + θq
0
− p
0
. Noting that all the consumers that satisfies
v + θq
0
− p
0
or θ ∈ [0,
θ](where
θ =
v−p
0
q
0
) will purchase the express service, we know the
China Post’s demand under such condition is
D
(I)
0
=1−
θ =
q
0
+ v − p
0
q
0
(1)
where 0 <v<p
0
is assumed. Here the constraint 0 <v<p
0
implies that a firm cannot obtain
a market with a zero quality service. Then, the profit of China Post is
π
(I)
0
=(p
0
+ b − c
0
)D
(I)
0
=
(p
0
+ b − c
0
)(v + q
0
− p
0
)
q
0
(2)
where b is the government’s subsidies to China Post for each delivery, and c
0
is its marginal
cost.
For the second scenario, consumers can purchase service from either China Post or the
private express firm. They make their choices to maximize their surplus. A consumer will be
indifferent between the two channels if and only if q
1
= q
0
,orv + θq
0
− p
0
= v + θq
1
− p
1
.Thus,
aconsumerwithθ
∗
=
p
1
−p
0
q
1
−q
0
is indifferent between the two channels. Consumers with θ<θ
∗
choose China Post’s delivery service, and consumers with θ>θ
∗
choose delivery service from
the private express firm, i.e.,
D
(II)
0
= θ
∗
−
θ =
v
q
0
+
p
1
Δq
−
1
Δq
+
1
q
0
p
0
(3)
