Pricing and competition in a transportation market with empty equipment repositioning

This paper studies a transportation market with two firms providing transportation service between two locations. There are potential demands for transportation service in both directions. Firms make decisions on prices. The realized demands reflect the price decisions of both firms. Equipment is required to transport demand from one location to the other. To sustain the business, firms have to reposition empty equipment from a surplus location to a shortage location and incur repositioning cost if the realized demands are unbalanced. We build a mathematical model to study the pricing strategy and analyze the outcome of competition. The optimal pricing strategy of a firm is either to achieve the balance of realized demands or treat these two directions as two separate markets. We also study the outcome of competition. In case of a duopoly market, we corroborate how the profit of a firm is affected by potential imbalance, unit loaded equipment movement cost, unit empty equipment repositioning cost, price sensitivity and the competition intensity. It is interesting to find that profit may increase with potential imbalance and with unit empty equipment repositioning cost.