A Cooperative Mechanism Between China Post and Private Express Firm for Remote Area Express Market
Summary (2 min read)
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 underdeveloped.
- For those urban residents they still have relatives or family members living in the remote areas.
- 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.
- The authors derive the optimal decisions of the system members in the three different scenarios.
- Second, the authors investigate in the perspective of quality improvement of express service from cities to remote areas that were not sufficiently considered in previous literatures.
2 Model Development
- The authors investigate the Niche market of express services from cities to remote areas.
- The considered market consists of China Post and a private express firm.
- Following the above reasons the authors assume the service quality of the private express firm (q1) is higher than that of China Post (q0), i.e., q0 < q1.
- In addition, the uniform distribution assumption follows a common practice in prior economic literature that model consumer taste on quality (e.g., [11–13]).
3 Results Comparison
- Comparing the three modes, which are China Post monopolistic mode, competition mode and cooperation mode, the authors can get Theorem 2 and Theorem 3.
- The high maintenance cost is unbearable for the private express firms who subject to shortage of money and pursue for profit maximization.
- Theorem 2 and Theorem 3 show that cooperation between China Post and the private express firm is a win-win game.
- Also, this mechanism is beneficial for customers, who require high quality delivery service and are price-insensitive.
4 Comparison Between Integrated System and Distributed System
- In the previous section, the authors have studied the decentralized system, in which China Post and the private express firm are two independent decision makers.
- They make decisions only depend on their own profit maximization, which will result in “Double Marginalization”.
- Now the authors investigate the integrated system.
- In order to remedy the “double marginalization” problem, the authors use revenue sharing contract (RSC) to coordinate the whole system so that it can achieve the optimal profit in integrated system.
- Under RSC, as the game leader, China Post proposes a subcontracting price w and sharing rate φ to the private express firm, where 0 φ 1 is the private express firm’s portions of the sale revenue.
5 The Optimal Overall Social Welfare
- The authors consider the resolution of the social planner problem.
- As is common in the industrial organization literature[16,17], it has been assumed that the social planner cares about total surplus of the relevant population.
- The welfare function consists of the sum of the service providers and the consumer surpluses.
- The authors investigate the optimal decision of the government aiming to achieve the optimal overall welfare in 3 different scenarios mentioned above, respectively.
- In Scenario 1, China Post monopolizes the express market from cities to remote areas.
6 Numerical Analysis
- The authors present numerical examples to investigate the impact of difference in two service qualities.
- In Figures 3–6, the authors plot the optimal profits and prices for various values of Δq. Figure 3 shows that for China Post, it has lowest profit in competition scenario.
- From Figure 4, the authors observe that the private express firm, with a huge maintenance and operating cost, would be pushed into loss under competition.
- The cooperation with China Post can improve its plight of the loss.
- Moreover, the improvement of the service quality can increase private express firm’s profits under cooperation and RSC contract.
7 Conclusions
- Due to the fast developing B2C e-commerce, the express industry has been developed in main cities.
- To examine whether the proposed cooperative mechanism works or not, the authors develop pricing models for the express service market in three different scenarios: (i) China Post monopolizes the remote area market; (ii) China Post competes with a private express company and (iii) China Post cooperatively provides service to the private firm.
- At last, the authors investigate the optimal regulation price maximizing social welfare in different scenarios.
- This is because that the price for the universal express services provided by China Post is formulated by government and be restricted to be low.
- One possible extension of their model is to consider the case of multiple private firms who directly compete with each other.
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References
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...As is common in the industrial organization literature([16,17]), it has been assumed that the social planner cares about total surplus of the relevant population....
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Frequently Asked Questions (2)
Q2. What are the future works mentioned in the paper "A cooperative mechanism between china post and private express firm for remote area express market" ?
There are several directions in which to extend their paper. Additionally, while the authors consider only the valuation is a constant to all consumers, they can relax the assumption to get some more general results.