Transportation Research Part B: Rongying Chen, Jing-Xin Dong, Chung-Yee Lee

Transportation Research Part B 85 (2016) 32–55
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Transportation Research Part B

journal homepage: www.elsevier.com/locate/trb
Pricing and competition in a shipping market with waste

shipments and empty container repositioning
Rongying Chen a, Jing-Xin Dong b, Chung-Yee Lee a,∗
a
Department of Industrial Engineering and Logistics Management, The Hong Kong University of Science and Technology, Clear Water Bay,
Kowloon, Hong Kong
b
Business School, Newcastle University, 5 Barrack Road, Newcastle upon Tyne NE1 4SE, UK
a r t i c l e i n f o a b s t r a c t
Article history: In this paper, we study a shipping market with carriers providing services between two
Received 27 June 2015 locations. Shipments are classified into two categories: goods and waste. Trade imbalance
Revised 15 December 2015
allows low-valued waste to be shipped at bargain rates. If imbalance persists, empty con-
Accepted 23 December 2015
tainers must be repositioned from a surplus location to a shortage location. Carriers decide
prices, which will affect the demand. We build a monopoly and a duopoly model to find
Keywords: the optimal pricing strategy for carriers. We also analyze how the profit of a carrier is
Waste shipment affected by price sensitivity, cost structure and competition intensity.
Empty container repositioning
© 2015 Elsevier Ltd. All rights reserved.
Price competition
1. Introduction
Maritime transportation is vital to the development of world economy since there is no effective alternative to the long-
distance transportation of large amounts of freight. Container shipping, which provides shipping services in standard units,
has become increasingly important in international freight transportation since the mid-1960s. According to UNCTAD (2014),
container ships transport an estimated 52% of global seaborne trade in terms of value. One difficult problem in container-
ized transportation is the empty container repositioning (ECR) problem arising from the imbalance of container flows. This
problem has become more conspicuous with the rapid growth of containerization and the regional difference in economic
development. Table 1 summarizes the annual containerized trade flows on three major trade routes from 2009 to 2013. It
can be seen that the volume from Asia to Europe was more than double that in the opposite direction. The transpacific
route experienced a similar situation. Such huge imbalances indicate the scale of empty container movements since the
empty containers must be repositioned from a surplus area to a deficit area.
Apart from the trade imbalance, which is the fundamental cause of the empty container movements, Song and Dong
(2015) point out that some other factors including dynamic operations, uncertainty, container size and type, lack of collab-
oration between channel members and shipping companies’ operational and strategic practices also cause the ECR problem.
Repositioning empty containers incurs extra cost but generates no profit. However, it is unavoidable due to the trade
imbalances among regions. For example, export-dominant ports like many ports in China constantly need empty contain-
ers, while import-dominant ports always have surplus empty containers. Instead of shipping empty containers, one way to
recover some of the operational cost is to fill those containers with waste and scrap.
Waste and scrap include paper waste, plastic scrap, metal scrap and other recyclable items. The trade imbalance allows
these low-valued products to be economically shipped for long distances. Rather than having containers returning empty,
∗
Corresponding author. Tel.: (852) 2358 7110.
E-mail address: cylee@ust.hk (C.-Y. Lee).
http://dx.doi.org/10.1016/j.trb.2015.12.012
0191-2615/© 2015 Elsevier Ltd. All rights reserved.
R. Chen et al. / Transportation Research Part B 85 (2016) 32–55 33
Table 1
Containerized trade flows on three major routes, 2009–2013 (Millions of TEUs).
Year Asia–Europe Transpacific Transatlantic
Asia–Eur Eur–Asia Asia–NA NA–Asia Eur–NA NA–Eur
2009 11.5 5.5 10.6 6.1 2.8 2.5

2010 13.3 5.7 12.3 6.5 3.2 2.7
2011 14.1 6.2 12.4 6.6 3.4 2.8
2012 13.7 6.3 13.1 6.9 3.6 2.7
2013 14.1 6.4 13.8 7.4 3.8 2.8
Source: UNCTAD (2014)
carriers offer bargain rates for these shipments to offset the ECR cost. Shipping a container full of metal scrap from Los
Angeles to China is cheaper than sending it to Chicago by train (see Ford 2013). Although shipping waste is not a profitable
business in itself, it usually does reduce the cost of repositioning empty containers. Besides, manufacturing with recycled
materials helps protect the environment and boost economic efficiency. All these benefits have encouraged the practice
of shipping waste. According to Morrison (2014), the U.S. sold $8.8 billion worth of waste and scrap to China in 2013,
accounting for about 7.2% of total U.S. exports to China. The European Commission (2014) reported that the EU exported €
7.1 billion worth of waste and scrap to non-OECD Decision countries in 2013.
Although shipping waste has attracted great interest from industry analysts, it has gone unnoticed by academics who
study the ECR problem. Carriers ship goods for one reason and waste for another: they ship goods to make profit and ship
waste to balance container flows, just like repositioning empty containers. But the academic research has not differentiated
between these two reasons; the research simply distinguishes “laden containers” from “empty containers”. Although some
works consider shipping multiple commodities, they do not capture the characteristics of waste shipments, while the dif-
ference of goods and waste has been well considered in our model. Besides, most works on the ECR problem are aimed at
finding optimal repositioning strategy given the imbalanced demand, and assume that the shipping prices do not affect de-
mand. But in reality, carriers charge more for the headhaul and charge less for the backhaul to ease the demand imbalance.
We try to fill in this gap and answer the following questions:
(1) What is the optimal pricing strategy for the carrier in a shipping market with waste shipments and ECR?
(2) Under what conditions should the carrier ship waste instead of repositioning empty containers? What would the gain
be from shipping waste?
(3) In the case of competition, does the Nash Equilibrium (NE) exist? If yes, what is the pricing strategy for the carriers?
(4) How will the carrier’s profit be affected by parameters like price sensitivity, cost structure and competition intensity?
To address these problems, we first build a monopoly model to find and analyze the carrier’s pricing strategy. The car-
rier’s strategy falls into four categories: seeking a balance of goods through shipment pricing; repositioning empty contain-
ers to achieve flow balance; shipping waste to achieve flow balance; shipping waste and repositioning empty containers
to achieve flow balance. Compared with two traditional approaches, our approach generates more profit. We then build a
duopoly model to analyze competition between two symmetric carriers. We prove that there exists a unique NE in this
game and provide solutions. We also compare our model with two traditional models in the case of duopoly. In addition,
we perform sensitivity analysis based on the results of these two models.
The main contribution of this paper is two fold. First, this is the first paper to consider shipping waste in the container
shipping market. Although shipping waste alone does not make money, it does help carriers offset the ECR cost under some
conditions. Second, most research on the ECR problem assumes the demand for shipping services is given and studies the
optimal repositioning strategy. Our work allows the demand to be affected by shipping prices, which in turn affects the
number of empty containers to be shipped.
The rest of the paper is organized as follows. In Section 2, we review the literature on the ECR problem and compe-
tition issue in the shipping market. Section 3 introduces the notations, assumptions and the model. We first analyze the
pricing strategy in the case of monopoly in Section 4. We then study the competition model with two symmetric carriers in
Section 5. Extensions on n symmetric carriers and two asymmetric carriers are in Section 6. Finally, conclusions are drawn
in Section 7.
2. Literature review
The ECR problem has drawn a lot of research attention since the beginning of containerization. Most of the work focuses
on the optimal repositioning strategy given the imbalanced flow of demand; that is, the demand is not controllable and must
be satisfied. Moon et al. (2010) consider the ECR problem with leasing and purchasing containers in a multi-port system.
Mixed integer programming and genetic algorithms are adopted to solve this problem. Li et al. (2007) develop a (U,D) policy
to allocate empty containers among multiple ports. For a port, empty containers are imported up to U if the number of
empty containers is less than U, or exported down to D if the number of empty containers is more than D. A heuristic
algorithm is designed to compute the specific allocation of empty containers among ports. Ng et al. (2012) develop an
optimal policy for transferring empty containers between two adjacent ports/depots with backlogging and random demand
and supply over a multi-period horizon. Stochastic dynamic programming is used to formulate this problem and structural
34 R. Chen et al. / Transportation Research Part B 85 (2016) 32–55
characteristics of the optimal solution are presented. Song and Earl (2008) build an integrated model to solve the empty
vehicle repositioning and fleet-sizing problem in a two-depot system. A threshold control policy is presented as the optimal
solution for the empty vehicle reposition problem. Long et al. (2012) propose a two-stage stochastic programming model
to minimize the ECR cost under random demand, supply and ship capacities. The sample average approximation method
is used to solve the model in the case of large scale. Erera et al. (2009) develop a robust optimization approach to find a
recoverable minimum cost repositioning plan. Song and Dong (2015) provide a comprehensive literature review on the ECR
problem from the network perspective and the inventory control perspective.
All of the above work assumes that the carrier cannot influence demand. A recent work by Lu et al. (2015) considers
coordinating pricing and the ECR problem in a two-depot system. They use the Markov decision process to formulate the
problem and under mild assumptions they derive an explicit structure of optimal strategies that is given by a price vector
and two target inventory levels for inbound and outbound repositioning. The carrier in our model can also influence demand
by setting different prices, which in turn affect the number of empty containers to be shipped. Besides, we consider shipping
waste as an alternative approach to realize flow balance.
Our work is also related to the research on competition in the shipping market. Competition in the shipping industry
is fierce and involves diverse parties like shippers, carriers, terminal operators and ports. Álvarez-SanJaime et al. (2013)
analyze the competition for freight transport between one road carrier and two liner shipping carriers by taking into account
economics of scale in the liner shipping market. A cooperative game model is adopted to analyze the horizontal integration
between shipping lines. Ishii et al. (2013) propose a game-theoretical model to study competition between two ports under
demand uncertainty. Ports compete for customers by setting appropriate port charges and a unique NE exists in this game.
A case study of competition between the ports of Busan and Kobe is also presented. Lee et al. (2012) use a multi-level
hierarchical approach to model the competition among oligopolistic ocean carriers, land carriers and terminal operators.
Wang et al. (2014) study the competition between two carriers in an emerging liner shipping market. Each carrier decides
the optimal freight rate, service frequency and ship capacity to maximize its payoff. Three game-theoretical models (Nash
game, Stackelberg game and deterrence game) are further investigated. They also consider a two-location market, but they
assume that the two carriers only compete for customers in one direction; that is, they implicitly assume that the carriers
have all containers returned empty.
Zhou and Lee (2009) represent the most related work to ours. They build mathematical models to find the optimal
pricing strategy for carriers in a shipping market with ECR. They also analyze how market competition affects carriers’
profit. Xu et al. (2015) extend Zhou and Lee (2009) by studying the pricing strategy in a shipping market with one carrier
and two forwarders. Stackelberg leader (carrier) provides shipping services between two ports and authorizes the forwarders
to collect cargos in different ports. The case of the carrier undertaking the ECR cost solely and the case of the carrier and
the forwarder sharing the cost are investigated. But both paper do not consider the option of shipping waste and scrap to
reduce carriers’ operational cost. To the best of our knowledge, our paper is the first to study pricing strategies in a shipping
market with waste shipments.
3. Notations, assumptions and the model
Consider two liner shipping companies denoted by carrier 1 and carrier 2 who compete the shipping services between
two ports denoted by A and B. Two kinds of shipping services are provided by both carriers: one is shipping goods usually of
high value and the service is priced at high rates; the other one is shipping waste and scrap, which are low-valued products
and the service is priced at low rates. There are potential demands for these two kinds of services in both directions. Laden
containers (for goods and waste) and empty containers can be shipped in both directions. For convenience, we use (g, A)
and (g, B) to represent goods shipments from A to B and from B to A, respectively. We use (w, A) and (w, B) to represent
waste shipments from A to B and from B to A, respectively. Since it is a two-location closed system,1 surplus containers
need to be returned as empty containers.
The following notations are used in this paper:
Indices
i = g, w g represents goods shipment and w represents waste shipment

j = A, B port of origin
k = 1, 2 carrier
Parameters
αi,k j potential demand for shipment i from port j for carrier k
βi,k j price sensitivity of shipment i from port j for carrier k
γi,kj competition intensity of shipment i from port j for carrier k
ci,k j unit cost of transporting shipment i from port j for carrier k
ekj unit cost of transporting empty container from port j for carrier k
Variables
pki, j unit price of transporting shipment i from port j charged by carrier k
di,k j realized demand of shipment i from port j for carrier k
qkj number of empty containers to be shipped from port j for carrier k
1
“Closed system” means that the carrier cannot sell or lease containers to others if it has surplus containers, and that the carrier cannot buy or lease
containers from others if it needs empty containers.
Carriers compete for customers on price and each carrier seeks to maximize its profit by appropriately pricing the service.
Define x+ = max(x, 0 ) and x− = max(−x, 0 ). Therefore, the optimization problem for carrier k is

max k ( pkg,A , pkg,B , pkw,A , pkw,B ) = ( pki, j − ci,k j )di,k j − ekA (dg,B
k k
+ dw,B k
− dg,A k
− dw,A )+
j i
− ekB (dg,A
k k
+ dw,A k
− dg,B k
− dw,B )+ (1)
subject to
di,k j = αi,k j − βi,k j pki, j + γi,kj ( p3−k

i, j
− pki, j ) ∀i, j (2)
di,k j , pki, j ≥ 0 ∀i, j (3)
The first term in (1) indicates the profit that the carrier collects from the shipper by providing shipping services and the
last two terms indicate the ECR cost if any imbalance exists. We assume that for each shipment (i, j), the demand for one
carrier’s service depends linearly on its own price and rival’s price, which is indicated by (2). And a similar linear demand
function can be observed in Charnes et al. (1972), Choi (1991) and Majumder and Groenevelt (2001). This means that when
carrier k cuts the price of shipment (i, j) by one unit, the demand will increase by (βi,k j + γi,kj ): βi,k j are the increase in
demand triggered by the lower price and γi,kj are demand attracted from its competitor. The larger γi,kj means carrier k will
grab more market share from its competitor for a given price drop, hence it can represent the intensity of competition. The
total demand for shipment (i, j) is di, j ( p1i, j , p2i, j ) = (αi,1 j + αi,2 j ) − (βi,1 j + γi,1j − γi,2j ) p1i, j − (βi,2 j + γi,2j − γi,1j ) p2i, j . We assume that
each carrier sets its price so that its own demand is nonnegative. We make this assumption in order to have a well-defined
demand function for the other carrier if either one decides not to provide service. In addition, we assume that all demand
can be satisfied, i.e. there is no capacity constraint.
Note that all parameters are positive and we impose the following assumptions on these parameters:
• ekA < min(cg,A

k , ck ) and ek < min (ck , ck ); that is, the cost of shipping one empty container is lower than the
w,A B g,B w,B
cost of shipping one laden container for each carrier. This relationship is intuitive and can be observed in the
industry.
• αg,A
k /β k > ck , α k /β k > ck ; that is, shipping goods is profitable if the price pk is in the interval (ck , α k /β k ). In
g,A g,A g,B g,B g,B g, j g, j g, j g, j
practice, shipping high-valued goods is the main source of profits for the carrier.
• αw,A
k /β k
w,A
< ekA , αw,B
k /β k < ek ; that is, the pricing ceiling of shipping waste is below the corresponding ECR cost for each
w,B B
carrier. This assumption, together with the first one, implies that transporting waste is always loss-making.2 However,
shipping waste may be a more cost-saving way to achieve flow balance than repositioning empty containers.
These assumptions facilitate our analysis and make the model more realistic.
4. Pricing strategies in a monopoly market
In this section, we first study the pricing strategy in the case of monopoly. Studying the market with one carrier will
give us a better understanding of pricing strategies with the existence of waste shipments and ECR. Since shipping al-
liances are very popular in the liner shipping sector, the monopoly model approximates the situation where one shipping
alliance dominates some service route and uses vessel-sharing agreements to offer integrated services and maximizes joint
profit.
With only one carrier, we omit the superscript in (1) and the demand function reduces to di, j = αi, j − βi, j pi, j .
Proposition 1 gives the carrier’s optimal pricing under various market conditions and cost structures.
Proposition 1. In the case of monopoly, the optimal pricing is as follows
2
The freight of waste shipments is very low, and it may or may not cover the shipping cost in reality. Here, we focus on those that are always loss-
making to emphasize the importance of considering the ECR cost when pricing and that even though some waste shipments are not profitable in them-
selves, they should not be ignored, as they may help to offset the ECR cost.
Table 2
Results of the monopoly model.
Condition ( p∗g,A , p∗g,B , p∗w,A , p∗w,B ) ∗

(dg,A
∗ ∗
, dg,B ∗
, dw,A ∗
, dw,B )
(qA , qB )
∗ ∗

α αg,A /βg,A +cg,A +T0 αg,B /βg,B +cg,B −T0 α α (zg,A −βg,A T0 )2 (zg,B +βg,B T0 )2
Case 1: T0 < min(cw,B − βw,B , eB ), , , βw,A , βw,B 4βg,A
+ 4βg,B
w,B
2 2
w,A w,B
α zg,A −βg,A T0 zg,B +βg,B T0

−T0 < min cw,A − βw,A , eA , , 0, 0 (0, 0)
w,A 2 2

α αg,A /βg,A +cg,A +eB αg,B /βg,B +cg,B −eB α α (zg,A −βg,A eB )2 (zg,B +βg,B eB )2
Case 2:eB ≤ T0 , eB < cw,B − βw,B 2
, 2
, βw,A , βw,B 4βg,A
+ 4βg,B
w,B
w,A w,B

zg,A −βg,A eB zg,B +βg,B eB (βg,A +βg,B )(T0 −eB )
2
, 2
, 0, 0 0, 2

(zg,B −βg,B eA )
2
α αg,A /βg,A +cg,A −eA αg,B /βg,B +cg,B +eA α α (zg,A +βg,A eA )2
Case 3: eA ≤ −T0 , eA < cw,A − βw,A 2
, 2
, βw,A , βw,B 4βg,A
+ 4βg,B
w,A
w,A w,B

zg,A +βg,A eA zg,B −βg,B eA (βg,A +βg,B )(−T0 −eA )
2
, 2
, 0, 0 2
,0

α αg,A /βg,A +cg,A +T1 αg,B /βg,B +cg,B −T1 α αw,B /βw,B +cw,B −T1 (zg,A −βg,A T1 )2 (zg,B +βg,B T1 )2 (zw,B +βw,B T1 )2
Case 4: T1 ≤ βg,A − cg,A , 2
, 2
, βw,A , 2 4βg,A
+ 4βg,B
+ 4βw,B
α
g,A
w,A

cw,B − βw,B ≤ T1 < eB zg,A −βg,A T1 zg,B +βg,B T1 zw,B +βw,B T1
w,B
2
, 2
, 0, 2
(0, 0)

α αg,A /βg,A +cg,A −T2 αg,B /βg,B +cg,B +T2 αw,A /βw,A +cw,A −T2 α (zg,A +βg,A T2 )2 (zg,B −βg,B T2 )2 (zw,A +βw,A T2 )2
Case 5: T2 ≤ βg,B − cg,B , 2
, 2
, 2
, βw,B 4βg,A
+ 4βg,B
+ 4βw,A
g,B w,B
αw,A
cw,A − β ≤ T2 < eA ( zg,A +βg,A T2
,
zg,B −βg,B T2
,
zw,A +βw,A T2
, 0 ) (0, 0)
w,A
2 2 2

α αg,A /βg,A +cg,A +eB αg,B /βg,B +cg,B −eB α α /β +c −e (zg,A −βg,A eB )2 (zg,B +βg,B eB )2 (zw,B +βw,B eB )2
Case 6: cw,B − βw,B ≤ eB , , , βw,A , w,B w,B2 w,B B 4βg,A
+ 4βg,B
+ 4βw,B
w,B

2 2
w,A

αg,A zg,A −βg,A eB zg,B +βg,B eB zw,B +βw,B eB (βg,A +βg,B +βw,B )(T1 −eB )
eB ≤ min β − cg,A , T1 , , 0, 0,
g,A 2 2 2 2

α αg,A /βg,A +cg,A −eA αg,B /βg,B +cg,B +eA αw,A /βw,A +cw,A −eA α (zg,A +βg,A eA )2 (zg,B −βg,B eA )2 (zw,A +βw,A eA )2
Case 7: cw,A − βw,A ≤ eA , , , , βw,B 4βg,A
+ 4βg,B
+ 4βw,A
w,A

2 2

2 w,B

αg,B zg,A +βg,A eA zg,B −βg,B eA zw,A +βw,A eA (βg,A +βg,B +βw,A )(T2 −eA )
eA ≤ min β − cg,B , T2 , , ,0 ,0
g,B 2 2 2 2
( p∗g,A , p∗g,B , p∗w,A , p∗w,B )

⎧ αg,A αg,B

⎪
⎪ βg,A +cg,A +T0 βg,B +cg,B −T0 α α α
i f − min cw,A − βw,A , eA < T0 < min(cw,B − βw,B , eB )
α
⎪
⎪ , , βw,A , βw,B
⎪
⎪ αg,A
2 2 w,A w,B

w,A w,B
⎪
⎪ αg,B
⎪
⎪ βg,A +cg,A +eB βg,B +cg,B −eB α α α
⎪
⎪ , , βw,A , βw,B i f eB ≤ T0 and eB < cw,B − βw,B
⎪
⎪ αg,A
2 2 w,A w,B

w,B
⎪
⎪ αg,B
⎪
⎪ βg,A +cg,A −eA βg,B +cg,B +eA α α α
⎪
⎪ , , βw,A , βw,B i f eA ≤ −T0 and eA < cw,A − βw,A
⎪
⎪
2 2 w,A w,B w,A
⎨ αg,A αg,B αw,B
βg,A +cg,A +T1 βg,B +cg,B −T1 α βw,B +cw,B −T1 α α

= , , βw,A , i f T1 ≤ βg,A − cg,A and cw,B − βw,B ≤ T1 < eB
⎪
⎪ αg,A
2 2 w,A 2

g,A w,B
⎪
⎪ αg,B αw,A
⎪ +c
⎪ βg,A g,A 2 ,
−T βg,B +cg,B +T2 βw,A +cw,A −T2 α α α
⎪
⎪ , , βw,B i f T2 ≤ βg,B − cg,B and cw,A − βw,A ≤ T2 < eA
⎪
⎪ αg,A
2 2 2 w,B

g,B w,A
⎪
⎪ αg,B αw,B
⎪
⎪ βg,A +cg,A +eB βg,B +cg,B −eB α βw,B +cw,B −eB α α
⎪
⎪ , , βw,A , i f cw,B − βw,B ≤ eB ≤ min βg,A − cg,A , T1
⎪
⎪ αg,A
2 2 w,A 2

w,B g,A
⎪
⎪ αg,B αw,A
⎪
⎪ β +cg,A −eA βg,B +cg,B +eA βw,A +cw,A −eA α α α
⎩ g,A 2 , 2
, 2
, βw,B
w,B
i f cw,A − βw,A ≤ eA ≤ min βg,B − cg,B , T2
w,A g,B
z −z z −z −z z −z −z
where zi, j = αi, j − βi, j ci, j ∀i, j, T0 = βg,A +βg,B , T1 = β g,A+βg,B +βw,B , T2 = β g,B+βg,A +βw,A . The corresponding demand and profit are
g,A g,B g,A g,B w,B g,A g,B w,A
summarized in Table 2.
The realized demands of goods are balanced if dg,A = dg,B , and imbalanced otherwise. Since it is a two-location closed
system, the carrier should always achieve flow balance, i.e., dg,A + dw,A + qA = dg,B + dw,B + qB . Then in case of imbalance of
goods shipments, the carrier can ship waste or empty containers, or both.
α
From Proposition 1, we find that the relationship between Ti , ( βi, j − ci, j ) and the corresponding ECR cost eA (eB ) is the
i, j
α α
key factor determining the carrier’s choice. Since βi, j is the price ceiling of shipment (i, j), ( βg, j − cg, j ) is the maximum
i, j g, j
α
possible profit from transporting one unit of goods. And (cw, j − βw, j ) is the minimum possible loss from transporting one
w, j
unit of waste. T0 , T1 , T2 respectively satisfy the following three equations:
αg,A − βg,A (cg,A + T0 ) = αg,B − βg,B (cg,B − T0 )
αg,A − βg,A (cg,A + T1 ) = αg,B − βg,B (cg,B − T1 ) + αw,B − βw,B (cw,B − T1 )
αg,B − βg,B (cg,B + T2 ) = αg,A − βg,A (cg,A − T2 ) + αw,A − βw,A (cw,A − T2 )
That is, if the carrier charges (cg,A + T0 ) and (cg,B − T0 ) for goods shipments from A to B and from B to A respectively, it
can achieve a balance of goods and gets zero profit. If it charges (cg,A + T1 ), (cg,B − T1 ) and (cw,B − T1 ) for goods shipments
from A to B and from B to A and waste shipment from B to A respectively, it does not need to reposition empty containers
and gets zero profit. T2 can be analyzed in a similar way. So we can regard T0 , T1 , T2 as balancing cost. More specifically, T0
is the balancing cost when the carrier only transports goods shipments (g, A) and (g, B). T1 (T2 ) is the balancing cost when
the carrier only transports goods shipments (g, A) and (g, B) and waste shipment (w, B) ((w, A)). Here balancing has two
meanings: no empty containers to be shipped and break-even point. So if the balancing cost T0 is lower than the loss from
shipping waste and the ECR cost, the carrier should seek a balance of goods through shipment pricing, as in Case 1.3
α
If the ECR cost eB (or eA ) is lower than the balancing cost T0 (or −T0 ) and the loss from shipping waste cw,B − βw,B (or
w,B
α
cw,A − βw,A ), the carrier should not seek a balance of goods through shipment pricing but should use empty containers to
w,A
achieve flow balance. The result in Case 2 (with Case 3 being its symmetric case) shows that the carrier should ignore
the waste shipments and treat the two directions of goods shipments independently. For goods shipment from A to B,
the carrier solves the problem max( pg,A − (cg,A + eB ))dg,A . For goods shipment from B to A, the carrier solves the problem
max( pg,B − (cg,B − eB ))dg,B . The goods shipment from B to A reduces the imbalance, so the carrier motivates customers in
this direction with incentives (negative repositioning cost). And since shipping goods from A to B worsens the imbalance,
the carrier charges customers more (positive repositioning cost) for shipping in this direction.
α α
But when cw,B − βw,B (or cw,A − βw,A ) is lower than the balancing cost T0 (or −T0 ) and the ECR cost eB (or eA ), the result is
w,B w,A
more complicated: the carrier may only ship waste to achieve flow balance (Case 4 and Case 5) or ship waste and reposition
empty containers (Case 6 and Case 7). Unlike the ECR cost, which is fixed, the loss from shipping waste depends on how
α
much the carrier charges, which is in the interval [0, βw, j ]. As long as cw,B − pw,B < eB (or cw,A − pw,A < eA ), shipping waste
w, j
is a more cost-saving strategy than shipping empty containers back. However, the number of waste shipments is limited
by the demand function, while the carrier can always ship all the empty containers back if it so desires. When the waste
shipments are not enough to realize flow balance, the carrier should reposition surplus containers.
α
The condition in Case 4 (with Case 5 being its symmetric case) implies cw,B − βw,B ≤ T0 4 and T1 < eB ; that is, the loss
w,B
from shipping waste is less than the balancing cost T0 , so the carrier should ship waste; the balancing cost T1 is less than
eB , so the carrier should not ship empty containers.
α
The condition in Case 6 (with Case 7 being its symmetric case) implies cw,B − βw,B ≤ eB and eB ≤ T1 . The ECR cost is less
w,B
than the balancing cost T1 , so apart from shipping waste, the carrier should also reposition empty containers.
Based on the above analysis, the carrier’s pricing strategy can be summarized in Proposition 2.
Proposition 2. In the case of monopoly,

α α
(1) If −min(cw,A − βw,A , eA ) < T0 < min(cw,B − βw,B , eB ), the carrier should seek a balance of goods through shipment pricing;
w,A w,B
α α
(2) If eB ≤ T0 and eB < cw,B − βw,B (or eA ≤ −T0 and eA < cw,A − βw,A ), the carrier should reposition empty containers to
w,B w,A
achieve flow balance;
α α α α
(3) If T1 ≤ βg,A − cg,A and cw,B − βw,B ≤ T1 < eB (or T2 ≤ βg,B − cg,B and cw,A − βw,A ≤ T2 < eA ), the carrier should ship waste
g,A w,B g,B w,A
to achieve flow balance;
α α α α
(4) If cw,B − βw,B ≤ eB ≤ min( βg,A − cg,A , T1 ) (or cw,A − βw,A ≤ eA ≤ min( βg,B − cg,B , T2 )), the carrier should ship waste and
w,B g,A w,A g,B
reposition empty containers to achieve flow balance.
Next, we will analyze how the profit of the carrier is affected by various parameters. We first investigate the influence
of price sensitivity, which is summarized in the following proposition.
(1) The profit of the carrier decreases in the price sensitivity of goods shipments β g, A and β g, B ;
(2) The profit of the carrier decreases in the price sensitivity of waste shipment β w, A (β w, B ) in Case 5 and Case 7 (Case 4 and
Case 6) and remains unchanged in other cases.
The price sensitivity measures how the demand is affected by the price and a higher price sensitivity means that the
carrier will lose more customers for a given price increase. Therefore, the carrier cannot capture more revenue from the
shipper at a higher price sensitivity.
The influence of cost structure on profit is summarized in Proposition 4.
(1) The profit of the carrier decreases in the unit cost of shipping goods cg, A and cg, B ;
3
The label of cases in Section 4 is shown in Table 2 and that in Section 5 is shown in Table 4.
βw,B
4
T0 = T1 + β +
g,A βg,B
(T1 + αβw,B
w,B α
w,B
α
w,B
α
− cw,B ) ≥ T1 if T1 ≥ cw,B − βw,B . Therefore, cw,B − βw,B ≤ T1 implies cw,B − βw,B ≤ T0 .
w,B
(2) The profit of the carrier decreases in the unit cost of shipping waste cw, A (cw, B ) in Case 5 and Case 7 (Case 4 and Case 6)
and remains unchanged in other cases;
(3) The profit of the carrier decreases in the unit ECR cost eA (eB ) in Case 3 and Case 7 (Case 2 and Case 6) and remains
unchanged in other cases.
Proposition 4 is intuitive as the profit is decreasing in the cost. For example, in Case 1, the carrier only transports
goods shipments in two directions and the profit can be written as ( pg,A − cg,A )dg,A + ( pg,B − cg,B )dg,B = ( pg,A − cg,A + pg,B −
cg,B )dg,A . As cg, A (cg, B ) increases, the prices of goods shipments in both directions increase. However, the sum of the unit
profit of goods shipments in two directions decreases. And the demand in each direction also decreases, hence the total
profit decreases. Under some conditions, the carrier will not ship waste or empty containers, so the profit may not be in-
fluenced by the cost of shipping waste or the cost of shipping empty containers. But in the duopoly model, results can be
quite different.
We compare our pricing strategy with two traditional approaches. In the current shipping industry, laden container trans-
portation and ECR are usually considered separately, and the ECR decisions are made after the laden container transporta-
tion decisions.5 Carriers who adopt this policy will not consider shipping waste since it is always loss-making. After the
demand for shipping goods is realized, surplus containers will be repositioned from a surplus location to a deficit location.
Based on this idea, the optimization problem is: max( pg,A , pg,B ) = ( pg,A − cg,A )dg,A + ( pg,B − cg,B )dg,B . Under this policy, the
carrier essentially treats goods shipments in the two directions independently. The optimal solution is easy to find: p∗g, j =
αg, j /βg, j +cg, j zg, j zg,A −zg,B
2 , j = A, B, and the number of empty containers to be shipped is |
∗ =
, j = A, B. The demand is dg, j 2 2 |.
z2 β +β
Therefore, the corresponding profit after deducting the repositioning cost is ∗ = j 4βg, j − g,A 2 g,B (eB T0+ + eA T0− ).
g, j
The second approach is discussed by Zhou and Lee (2009). In their model, the carrier considers ECR cost when
making decisions regarding laden containers, but the carrier only ships goods. Therefore, the optimization problem is
max( pg,A , pg,B ) = ( pg,A − cg,A )dg,A + ( pg,B − cg,B )dg,B − eA (dg,B − dg,A )+ − eB (dg,A − dg,B )+ , and the optimal pricing is
⎧ α /β +c +T α /β +c −T
⎪
⎪
g,A g,A g,A 0
, g,B g,B2 g,B 0 if −eA < T0 < eB
⎪
⎨
2

αg,A /βg,A +cg,A +eB αg,B /βg,B +cg,B −eB
( p∗g,A , p∗g,B ) = , if T0 ≥ eB
⎪
⎪
2 2

⎪
⎩ αg,A /βg,A +cg,A −eA , αg,B /βg,B +cg,B +eA
2 2
if T0 ≤ −eA
The corresponding profit is

⎧ (zg,A −βg,A T0 )2 (zg,B +βg,B T0 )2
⎪
⎪ + if −eA < T0 < eB
⎨ 4βg,A 4βg,B
(zg,A −βg,A eB )2 (zg,B +βg,B eB )2
=∗
4βg,A
+ 4βg,B
if T0 ≥ eB
⎪
⎪
⎩ (zg,A +βg,A eA )2 (zg,B −βg,B eA )2
4βg,A
+ 4βg,B
if T0 ≤ −eA
Let 1 and 2 denote the differences in profit between our approach and the two traditional approaches. The results
are shown in Table 3.
Note that 1 ≥ 0 and 2 ≥ 0 for all cases. Compared with the laden container-dominant strategy, our approach al-
ways generates more profit (unless zg,A = zg,B , then 1 = 0). Rather than treating customers shipping in the two directions
equally, we charge the customer who alleviates the imbalance less, and charge the customer who exacerbates the imbalance
more. The cost saving from repositioning empty containers is greater than the decrease in profit from shipping goods. This
emphasizes the importance of considering the ECR problem when pricing shipping services.
Our approach also gives better results than Zhou and Lee’s approach. In first three cases, neither pricing scheme trans-
ports waste shipments, so the profits are the same. But in the last four cases, shipping waste is a more cost-saving strategy
than repositioning empty containers, so our approach generates more profit. Even though shipping waste alone is always
loss-making, it does facilitate flow balance under certain conditions.
5. Pricing strategies in a duopoly market
The first model only considers the market with one carrier or without competition. Now we study the situation
where two carriers choose prices simultaneously and independently to maximize their own profit. Here we only consider
symmetric carriers, so we assume αi,1 j = αi,2 j = αi, j , βi,1 j = βi,2 j = βi, j , γi,1j = γi,2j = γi, j , ci,1 j = ci,2 j = ci, j , ∀i, j, e1A = e2A = eA and
e1B = e2B = eB . Having symmetric carriers facilitates our analysis while still allowing us to obtain interesting insights when
competition exists.
Under this symmetric game, we have the following theorem:
5
For simplicity, we call it the laden container-dominant strategy.
Table 3
Profit differences between our model and traditional models in the
case of monopoly.
Case 1
βg,A +βg,B
Case 1 4
[(2eB − T0+ )T0+ + (2eA − T0− )T0− ]
(βg,A +βg,B )e2B
Case 2 4
(βg,A +βg,B )e2A
Case 3 4
(zw,B +βw,B T1 )2 (βg,A +βg,B )(T12 +2T0 (eB −T1 ))
Case 4 4βw,B
+ 4
(zw,A +βw,A T2 )2 (βg,A +βg,B )(T22 −2T0 (eA −T2 ))
Case 5 4βw,A
+ 4
(zw,B +βw,B eB )2 (βg,A +βg,B )e2B
Case 6 4βw,B
+ 4
(zw,A +βw,A eA )2 (βg,A +βg,B )e2A
Case 7 4βw,A
+ 4
Case 2
Case 1 0
Case 2 0
Case 3 0
(zw,B +βw,B T1 )2 (β +β )(T −T )2
Case 4 if T0 < eB : 4βw,B
+ g,A g,B4 0 1
(zw,B +βw,B T1 )2 (β +β )(e −T )(2T −T −e )
if T0 ≥ eB : 4βw,B
+ g,A g,B B 4 1 0 1 B
(zw,A +βw,A T2 )2 (βg,A +βg,B )(−T0 −T2 )2
Case 5 if −T0 < eA : 4βw,A
+ 4
(zw,A +βw,A T2 )2 (βg,A +βg,B )(eA −T2 )(−2T0 −T2 −eA )
if −T0 ≥ eA : 4βw,A
+ 4
(zw,B +βw,B eB )2
Case 6 4βw,B
(zw,A +βw,A eA )2
Case 7 4βw,A
Theorem 1. There exists a unique symmetric pure strategy NE in this game.
This theorem means that we can make a unique prediction of the two carriers’ pricing decisions and neither of them has
the incentive to deviate from this NE. Besides, the pricing decisions of these two carriers are the same, which are given in
the next proposition.
Proposition 5. In the case of duopoly with symmetric carriers, NE prices are as follows
( pk∗
g,A
, pk∗
g,B
, pk∗
w,A
, pk∗
w,B
)
⎧ αg,A αg,B

⎪
⎪ βg,A +γg,A +cg,A +T0
D
βg,B +γg,B +cg,B −T0
D
αw,A αw,B α α
⎪
⎪ 2−ρg,A
, 2−ρg,B
, ,
βw,A βw,B i f − min cw,A − βw,A , eA < T0D < min cw,B − βw,B , eB
⎪
⎪ αg,A
w,A w,B
⎪
⎪ αg,B
⎪
⎪ βg,A +γg,A +cg,A +eB βg,B +γg,B +cg,B −eB αw,A αw,B α
⎪
⎪ 2−ρg,A
, 2−ρg,B
,β ,β i f eB ≤ T0D , eB < cw,B − βw,B
⎪
⎪ w,A w,B w,B
⎪
⎪ α α
⎪
⎪
g,A
+c −e g,B
+c +e
αw,A αw,B α
⎪ βg,A +γg,A βg,B +γg,B
g,A A g,B A
⎪ , , , i f eA ≤ −T0D , eA < cw,A − βw,A
⎪
⎪
2−ρg,A 2−ρg,B βw,A βw,B w,A
⎪
⎨ αg,A αg,B αw,B
βg,A +γg,A +cg,A +T1 βg,B +γg,B +cg,B −T1

D D
βw,B +γw,B +cw,B −T1
D
α αg,A αw,B
= 2−ρg,A
, 2−ρg,B
, βw,A , 2−ρw,B βg,A i f TD ≤
βw,B − cg,A , cw,B − ≤ T D < eB
⎪
⎪ αg,A
w,A

1 1
⎪
⎪ αg,B αw,A
⎪
⎪ βg,A +γg,A +cg,A −T2
D
β +γg,B +cg,B +T2
D
β +γw,A
+cw,A −T2 α
D
α α
⎪
⎪ 2−ρg,A
, g,B 2− ρg,B , w,A 2− ρw,A , βw,B i f T2D ≤ βg,B − cg,B , cw,A − βw,A ≤ T2D < eA
⎪
⎪ w,B g,B w,A
⎪
⎪ αg,A

⎪
⎪ +c +e
αg,B
+c −e
αw,B
+c
αw,A βw,B +γw,B w,B B −e αw,B αg,A
⎪ βg,A +γg,A βg,B +γg,B
g,A B g,B B
⎪ , , , i f c − ≤ e ≤ min − c , T D
⎪
⎪ 2−ρg,A 2−ρg,B βw,A 2−ρw,B w,B βw,B B βg,A g,A 1
⎪
⎪ αg,A

⎪
⎪ β +γg,A +cg,A −eA
αg,B
β +γg,B +cg,B +eA
αw,A
+cw,A −eA α
⎪
⎩ g,A 2− , g,B 2−
β
, w,A 2−
+γw,A
, βw,B
α α
i f cw,A − βw,A ≤ eA ≤ min βg,B − cg,B , T2D
ρg,A ρg,B ρw,A w,B w,A g,B
zg,A z zg,A z z zg,B z z

γ 2−ρg,A
− 2−g,B
ρ 2−ρg,A
− 2−g,B w,B
ρ − 2−ρ 2−ρg,B
− 2−g,A w,A
ρ − 2−ρ
where ρi, j = β +i, γj ∀i, j, T0D = βg,A β
g,B
, T1D = βg,A β
g,B
βw,B
w,B
, T2D = βg,A β
g,A
βw,A
w,A
. The corresponding demand
i, j i, j
2−ρg,A
+ 2−g,B
ρ 2−ρg,A
+ 2−g,B
ρ + 2−ρ 2−ρg,A
+ 2−g,B
ρ + 2−ρ
g,B g,B w,B g,B w,A
and profit are summarized in Table 4.
By conducting a similar analysis to that on the monopoly model, each carrier’s pricing strategy can be summarized in
Proposition 6.
Table 4
Results of the duopoly model.
Condition ( pk∗
g,A g,B , pw,A , pw,B )
, pk∗ k∗ k∗
k∗
(dg,A
k∗
, dg,B
k∗
, dw,A
k∗
, dw,B
k∗
)
(qk∗
A B )
, qk∗
αg,A αg,B

D D
α α α (zg,A −βg,A T0D )2 ( z +β T D ) 2
Case 1: T0D < min(cw,B − βw,B , eB ), 2−ρg,A
, 2−ρg,B
, βw,A , βw,B (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (g,B 0
βg,B +γg,B )
w,B w,A w,B g,B
α
−T0D < min(cw,A − βw,A , eA )
zg,A −βg,A T0D zg,B +βg,B T0D
, , 0, 0
w,A
2−ρg,A 2−ρg,B
(0, 0)
αg,A αg,B
α βg,A +γg,A +cg,A +eB βg,B +γg,B +cg,B −eB α α (zg,A −βg,A eB )2 ( z +β e ) 2
Case 2: eB ≤ T0D , eB < cw,B − βw,B 2−ρg,A
, 2−ρg,B
, βw,A , βw,B (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B B+γ )
w,B w,A w,B g,B g,B g,B

zg,A −βg,A eB zg,B +βg,B eB βg,A βg,B
2−ρg,A
, 2−ρg,B
, 0, 0 0, 2−ρg,A
+ 2−ρg,B
(T0D − eB )
αg,A αg,B
α βg,A +γg,A +cg,A −eA βg,B +γg,B +cg,B +eA α α (zg,A +βg,A eA )2 ( z −β e ) 2
Case 3: eA ≤ −T0D , eA < cw,A − βw,A 2−ρg,A
, 2−ρg,B
, βw,A , βw,B (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B A+γ )
w,A w,A w,B g,B g,B g,B

zg,A +βg,A eA zg,B −βg,B eA βg,A βg,B
2−ρg,A
, 2−ρg,B
, 0, 0 2−ρg,A
+ 2−ρg,B
(−T0D − eA ), 0
αg,A αg,B αw,B

D D
D
α α (zg,A −βg,A T1D )2 (zg,B +βg,B T1D )2
Case 4: T1D ≤ βg,A − cg,A , 2−ρg,A
, 2−ρg,B
, βw,A , 2−ρw,B (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B +γg,B )
g,A w,A
α
cw,B − βw,B ≤ T1D < eB ( z +β T ) D 2
+ (2−ρw,B )2 (βw,B 1+γ )
zg,A −βg,A T1D zg,B +βg,B T1D zw,B +βw,B T1D
, , 0,
w,B
2−ρg,A 2−ρg,B 2−ρw,B
(0, 0) w,B w,B w,B
αg,A αg,B αw,A
βg,A +γg,A +cg,A −T2 βg,B +γg,B +cg,B +T2

D D
βw,A +γw,A +cw,A −T2
D
α α (zg,A +βg,A T2D )2 (zg,B −βg,B T2D )2
Case 5: T2D ≤ βg,B − cg,B , 2−ρg,A
, 2−ρg,B
, 2−ρw,A
, βw,B (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B +γg,B )
g,B w,B
α
cw,A − βw,A ≤ T2D < eA ( z +β T D ) 2
+ (2−ρw,A )2 (βw,A 2+γ )
zg,A +βg,A T2D zg,B −βg,B T2D zw,A +βw,A T2D
, , ,0
w,A
2−ρg,A 2−ρg,B 2−ρw,A
(0, 0) w,A w,A w,A
αg,A αg,B αw,B
α βg,A +γg,A +cg,A +eB βg,B +γg,B +cg,B −eB α βw,B +γw,B +cw,B −eB (zg,A −βg,A eB )2 (zg,B +βg,B eB )2
Case 6: cw,B − βw,B ≤ eB , 2−ρg,A
, 2−ρg,B
, βw,A , 2−ρw,B (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B +γg,B )
w,B
w,A
α ( z +β e ) 2
+ (2−ρ w,B)2 (βw,B B+γ )
eB ≤ min βg,A − cg,A , T1D zg,A −βg,A eB zg,B +βg,B eB zw,B +βw,B eB
g,A
2−ρg,A
, 2−ρg,B
, 0, 2−ρw,B
w,B w,B w,B

βg,A βg,B βw,B
0, 2−ρg,A
+ 2−ρg,B
+ 2−ρw,B
(T1D − eB )
αg,A αg,B αw,A
α βg,A +γg,A +cg,A −eA βg,B +γg,B +cg,B +eA βw,A +γw,A +cw,A −eA α (zg,A +βg,A eA )2 (zg,B −βg,B eA )2
Case 7: cw,A − βw,A ≤ eA , 2−ρg,A
, 2−ρg,B
, 2−ρw,A
, βw,B (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B +γg,B )
w,A
w,B
α ( z +β e ) 2
+ (2−ρ w,A)2 (βw,A A+γ )
eA ≤ min βg,B − cg,B , T2D zg,A +βg,A eA zg,B −βg,B eA zw,A +βw,A eA
g,B
2−ρg,A
, 2−ρg,B
, 2−ρw,A
,0 w,A w,A w,A

βg,A βg,B βw,A
2−ρg,A
+ 2−ρg,B
+ 2−ρw,A
(T2D − eA ), 0
Proposition 6. In the case of duopoly with symmetric carriers,
α α
(1) If −min(cw,A − βw,A , eA ) < T0D < min(cw,B − βw,B , eB ), each carrier should seek a balance of goods through shipment pric-
w,A w,B
ing;
α α
(2) If eB ≤ T0D and eB < cw,B − βw,B (or eA ≤ −T0D and eA < cw,A − βw,A ), each carrier should reposition empty containers to
w,B w,A
achieve flow balance;
α α α α
(3) If T1D ≤ βg,A − cg,A and cw,B − βw,B ≤ T1D < eB (or T2D ≤ βg,B − cg,B and cw,A − βw,A ≤ T2D < eA ), each carrier should ship
g,A w,B g,B w,A
waste to achieve flow balance;
α α α α
(4) If cw,B − βw,B ≤ eB ≤ min( βg,A − cg,A , T1D ) (or cw,A − βw,A ≤ eA ≤ min( βg,B − cg,B , T2D )), each carrier should ship waste and
w,B g,A w,A g,B
reposition empty containers to achieve flow balance.
Compared to Proposition 2, the only difference is that Ti changes to TiD . If ρg,A = ρg,B = ρw,A = ρw,B , we have Ti = TiD ,
which means the conditions under which the carrier should seek a balance of goods through shipment pricing or use empty
containers and waste shipments to achieve flow balance are the same for the monopoly case and the duopoly case, although
the prices and realized demands are different, as are the profits.
Now we compare the results of the duopoly model with those of the monopoly model. If the competition intensity γ i, j ,
∀i, j, is equal to zero, the two carriers can be treated as providing services in two separate markets, but only having half of
the potential demand. Then compared with the case of monopoly, the carriers set the same price but the demand is halved,
so the profit is also halved. The total profit of the two carriers is the same as that of the monopolist. When competition
exists, carriers will cut their own price to attract demand from the competitor. Although each carrier’s demand is more than
half of the monopolist’s, the total profit of the two carriers is decreasing. That is how a strategic alliance can benefit carriers
apart from reducing cost via economies of scale and increasing space utilization. The impact of competition intensity on
each carrier’s profit is further described in the next proposition.

a b
Fig. 1. The relationship between the profit from shipment and price.
(1) The profit of each carrier decreases in the competition intensity of goods shipment γ g, A (γ g, B ) in Cases 1, 2, 3, 4, 6, 7
(Cases 1, 2, 3, 5, 6, 7);
(2) The profit of each carrier decreases in the competition intensity of waste shipment γ w, A (γ w, B ) in Case 7 (Case 6) and
remains unchanged in Cases 1, 2, 3, 4, 6 (Cases 1, 2, 3, 5, 7);
(3) The profit of each carrier decreases (remains unchanged, increases) in the competition intensity of backhaul shipment γ i, A
k∗ ρ ( β β−i,A ρ ρ
(i = g, w) if di,A g,B
i,A 2−ρ + 2−ρ−i,A ) + βi,A (dg,B
k∗ g,B
2−ρ
k∗
− d−i,A −i,A
2−ρ ) > (=, < )06 in Case 5;
g,B g,B −i,A
(4) The profit of each carrier decreases (remains unchanged, increases) in the competition intensity of backhaul shipment γ i, B
k∗ ρ ( β β−i,B ρ ρ
(i = g,w) if di,B g,A
i,B 2−ρ + 2−ρ−i,B ) + βi,B (dg,A
k∗ g,A
2−ρ
k∗
− d−i,B −i,B
2−ρ ) > (=, < )0 in Case 4.
g,A g,A −i,B
As γ i, j increases, the carriers have more incentives to lower their own price of shipment (i, j), so that they can attract
more demand from their rival. But whether the increase in demand will compensate for the decrease in unit profit is not
clear. Besides, change of γ i, j may affect the price and demand for other shipments.
In Case 1, the carriers only transport goods shipments (g, A) and (g, B). Therefore, each carrier’s profit is k = ( pkg,A −
cg,A )dg,A
k + ( pk − c
g,B g,B )dg,B . Since the two symmetric carriers will have the same price, the profit can be written as =
k k
( pkg,A − cg,A )(αg,A − βg,A pkg,A ) + ( pkg,B − cg,B )(αg,B − βg,B pkg,B ). Then the profit of carrier k can be decomposed into two parts:
one from goods shipment from A to B and the other one from goods shipment from B to A. And if we want to maximize the
αg,A /βg,A +cg,A αg,B /βg,B +cg,B
profit, shipment (g, A)’s and shipment (g, B)’s price should be 2 and 2 , respectively. If T0D > 0, NE price
α /(β +γ )+c +T D α /β +cg,A α /(β +γ )+c −T D α /β +cg,B 7
pk∗
g,A
= g,A g,A2−ρg,A g,A 0 can be higher or lower than g,A g,A
2 , while pk∗
g,B
= g,B g,B2−ρg,B g,B 0 < g,B g,B
2 . As
g,A g,B
γ g, A (γ g, B ) increases, both pk∗
g,A
and pk∗
g,B
will decrease. Therefore, the profit from shipment (g, A) can increase or decrease,
αg,A /βg,A +cg,A
while the profit from shipment (g, B) will decrease (see Fig. 1). If T0D ≤ 0, NE price pk∗
g,A
≤ 2 , while pk∗
g,B
can be
α /β +c
higher or lower than g,B g,B
2
g,B
. The impact of increase in γ g, A and γ g, B can be drawn in a similar figure. Proposition 7(1)
says that an increase in the competition intensity γ g, A and γ g, B will always lead to a decrease in the total profit in Case 1.
In Case 2 (with Case 3 being its symmetric case), the carriers transport goods shipments (g, A) and (g, B), and have sur-
plus containers returned empty. Therefore, each carrier’s profit is k = ( pkg,A − cg,A )dg,A
k + ( pk − c
g,B g,B )dg,B − eB (dg,A − dg,B ) =
k k k
( pkg,A − cg,A − eB )(αg,A − βg,A pkg,A ) + ( pkg,B − cg,B + eB )(αg,B − βg,B pkg,B ). And if we want to maximize the profit, shipment (g,
αg,A /βg,A +cg,A +eB αg,B /βg,B +cg,B −eB
A)’s and shipment (g, B)’s price should be 2 and 2 , respectively. However, NE price pk∗
g,A
=
αg,A /(βg,A +γg,A )+cg,A +eB α /β +c +e αg,B /(βg,B +γg,B )+cg,B −eB α /β +c −e
2−ρg,A ≤ g,A g,A2 g,A B 8 and pk∗
g,B
= 2−ρg,B ≤ g,B g,B2 g,B B .9 Besides, pk∗
g,A
is decreasing in γ g, A
and pk∗
g,B
is decreasing in γ g, B . Since the profit from shipment (g, A) ((g, B)) is a concave function of price, then as γ g, A
6
If i = g, then −i = w and if i = w, then −i = g.
αg,B /(βg,B +γg,B )+cg,B
αg,B /(βg,B +γg,B )+cg,B ∂ 2−ρg,B α −βg,B cg,B αg,B /(βg,B +γg,B )+cg,B αg,B /(βg,B +γg,B )+cg,B
7
If T0D > 0, pk∗
g,B < 2−ρg,B
. Besides, ∂γg,B = − (2g,B
βg,B +γg,B )
2 < 0, 2−ρg,B
is decreasing in γ g, B and when γg,B = 0, 2−ρg,B
=
αg,B /βg,B +cg,B αg,B /βg,B +cg,B
2
. Therefore, pg,B < k∗
2
for γ g, B ≥ 0.
∂ pk∗ αg,A −βg,A (cg,A +eB ) αg,A /βg,A +cg,A +eB αg,A /βg,A +cg,A +eB
8
Since ∂γg,A = −
g,A (2βg,A +γg,A )2 < 0, pk∗
g,A
is decreasing in γ g, A and when γg,A = 0, pk∗
g,A
= 2
. Therefore, pk∗
g,A
≤ 2
for γ g, A ≥ 0.
∂ pk∗ αg,B −βg,B (cg,B −eB ) αg,B /βg,B +cg,B −eB αg,B /βg,B +cg,B −eB
9
Since ∂γg,B
g,B
= − (2β +γ )2 < 0, pk∗
g,B g,B g,B is decreasing in γ g, B and when γg,B = 0, pk∗
g,B = 2
. Therefore, pk∗
g,B ≤ 2
for γ g, B ≥ 0.
a b
c d
(γ g, B ) increases, the carrier’s profit from shipment (g, A) ((g, B)) will decrease, while the profit from shipment (g, B) ((g, A))
will not be affected. Therefore, the total profit is decreasing in γ g, A and γ g, B .
In Case 4 (with Case 5 being its symmetric case), the carriers transport goods shipments (g, A) and (g, B), and
waste shipment (w, B). Therefore, each carrier’s profit is k = ( pkg,A − cg,A )dg,A
k + ( pk − c
g,B g,B )dg,B + ( pw,B − cw,B )dw,B = ( pg,A −
k k k k
cg,A )(αg,A − βg,A pkg,A ) + ( pkg,B − cg,B )(αg,B − βg,B pkg,B ) + ( pkw,B − cw,B )(αw,B − βw,B pkw,B ). To maximize the total profit, shipments
αg,A /βg,A +cg,A αg,B /βg,B +cg,B αw,B /βw,B +cw,B
(g, A)’s, (g, B)’s and (w, B)’s price should be 2 , 2 and 2 , respectively. However, NE price
α /(β +γ )+c +T D α /β +cg,A α /(β +γ )+c −T D α /β +cg,B
pk∗
g,A
= g,A g,A2−ρg,A g,A 1 can be higher or lower than g,A g,A 2 , pk∗
g,B
= g,B g,B2−ρg,B g,B 1 ≤ g,B g,B
2 and pk∗
w,B
=
g,A g,B
αw,B /(βw,B +γw,B )+cw,B −T1
D αw,B /βw,B +cw,B
2−ρw,B ≤ 2 . As γ g, A increases, pg,A , pg,B and pw,B will decrease and the change in profit from
k∗ k∗ k∗
three shipments can be seen in Fig. 2(a)–(c), that is, the profit from shipment (g, A) may increase or decrease while the
profit from shipment (g, B) and shipment (w, B) will decrease. As γ g, B increases, pk∗ g,A
and pk∗
g,B
will decrease, while pk∗
w,B
will increase. And the change in profit from three shipments can be seen in Fig. 2(a), (b) and (d), that is, the profit from
shipment (g, A) may increase or decrease, the profit from shipment (g, B) will decrease, and the profit from shipment (w, B)
will increase. The final effect on the total profit depends on whether the positive effect will outweigh the negative effect.
Proposition 7(1) says that an increase in γ g, A will always lead to a decrease in profit in Case 4. Proposition 7(4) says that
k∗ ρ β βw,B ρ ρ
only when dg,B g,B ( 2−ρ
g,A
+ 2−ρw,B ) + βg,B (dg,A
k∗ g,A
2−ρ
k∗
− dw,B w,B
2−ρ ) < 0 can an increase in γ g, B lead to an increase in profit
g,A g,A w,B
in Case 4 and the numerical result is shown in Fig. 3(a). Shipment (w, B) plays a similar role as shipment 2 in Case 4, and
the impact of γ w, B on the carrier’s profit is shown in Fig. 3(b).
In Case 6 (with Case 7 being its symmetric case), the carriers transport goods shipments (g, A) and (g, B), waste ship-
ment (w, B) and have surplus containers returned empty. Therefore, each carrier’s profit is k = ( pkg,A − cg,A )dg,A
k + ( pk −
g,B
cg,B )dg,B
k + ( pk
w,B
− cw,B )dw,B
k − eB (dg,A
k − d k − d k ) = ( pk − c
g,B w,B g,A g,A − eB )dg,A + ( pg,B − cg,B + eB )dg,B + ( pw,B − cw,B + eB )dw,B .
k k k k k By
conducting a similar analysis to that in Case 2, we can explain why the total profit for each carrier is decreasing in γ g, A ,
γ g, B and γ w, B .
a b
Fig. 3. Profit against competition intensity γ g, B and γ w, B in Case 4.
a b
Fig. 4. Profit against ECR cost eA .
The influence of ECR cost on each carrier’s profit is summarized in Proposition 8.
(1) The profit of each carrier decreases (remains unchanged, increases) in the ECR cost eA in Case 3 if eA < (=, > )
zg,B zg,A
−
(2−ρg,B )2 /(1−ρg,B ) (2−ρg,A )2 /(1−ρg,A )
βg,A βg,B ;
+
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B )
(2) The profit of each carrier decreases (remains unchanged, increases) in the ECR cost eB in Case 2 if eB < (=, > )
zg,A zg,B
−
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B )
βg,A βg,B ;
+
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B )
(3) The profit of each carrier decreases (remains unchanged, increases) in the ECR cost eA in Case 7 if eA < (=, > )
zg,B zg,A zw,A
− −
(2−ρg,B )2 /(1−ρg,B ) (2−ρg,A )2 /(1−ρg,A ) (2−ρw,A )2 /(1−ρw,A )
βg,A βg,B βw,A ;
+ +
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B ) (2−ρw,A )2 /(1−ρw,A )
(4) The profit of each carrier decreases (remains unchanged, increases) in the ECR cost eB in Case 6 if eB < (=, > )
zg,A zg,B zw,B
− −
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B ) (2−ρw,B )2 /(1−ρw,B )
βg,A βg,B βw,B ;
+ +
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B ) (2−ρw,B )2 /(1−ρw,B )
(5) The profit of each carrier remains unchanged in the ECR cost eA and eB in Case 1, Case 4 and Case 5.
Surprisingly the profit may sometimes increase in the ECR cost. As the ECR cost increases, the carriers will try to reduce
the trade imbalance. Under Case 3, the increase in eA leads to (1) a decrease in the equilibrium price and an increase in
the equilibrium demand for goods shipment from A to B; (2) an increase in the equilibrium price and a decrease in the
equilibrium demand for goods shipment from B to A; (3) a decrease in the number of empty containers to be shipped from
A to B. The final effect on the profit depends on whether the positive effect or the negative effect will dominate. Only when
zg,B zg,A
−
(2−ρg,B )2 /(1−ρg,B ) (2−ρg,A )2 /(1−ρg,A )
eA increases to βg,A βg,B will the positive effect outweigh the negative effect; otherwise, the profit is
+
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B )
zg,B zg,A
−
(2−ρg,B )2 /(1−ρg,B ) (2−ρg,A )2 /(1−ρg,A )
decreasing in eA (see Fig. 4(a)). Note that eA ≤ −T0D and βg,A βg,B < −T0D is possible only when ρ g, A <
+
(2−ρg,A )2 /(1−ρ g,A ) (2−ρg,B )2 /(1−ρ g,B )
ρ g, B . Therefore, an increase in ECR cost will not lead to an increase in the profit in the monopoly market (ρg,A = ρg,B = 0).
The effect of eA on the profit under Case 7 can be analyzed in a similar way and the numerical result is shown in Fig. 4(b).
Table 5
Profit differences between our model and traditional models in the case of duopoly.
Case D1

βg,A βg,B
Case 1 T0D2 (ψg,A + ψg,B ) + 2−ρg,A
+ 2−ρg,B
((eB − T0D )T0D+ + (eA + T0D )T0D− ) + T0D (φg,A − φg,B ) ≥ 0
Case 2 e2B (ψg,A + ψg,B ) + eB (φg,A − φg,B )
Case 3 e2A (ψg,A + ψg,B ) + eA (φg,B − φg,A )

(zw,B +βw,B T1D )2 βg,A βg,B
Case 4 (2−ρw,B )2 (βw,B +γw,B ) + T1D2 (ψg,A + ψg,B ) + 2−ρg,A
+ 2−ρg,B
(eB − T1D )T0D + T1D (φg,A − φg,B ) ≥ 0

(zw,A +βw,A T2D )2 βg,A βg,B
Case 5 (2−ρw,A )2 (βw,A +γw,A ) + T2D2 (ψg,A + ψg,B ) + 2−ρg,A
+ 2−ρg,B
(T2D − eA )T0D + T2D (φg,B − φg,A ) ≥ 0
(zw,B +βw,B eB )2
Case 6 (2−ρw,B )2 (βw,B +γw,B ) + e2B (ψg,A + ψg,B ) + eB (φg,A − φg,B )
(zw,A +βw,A eA ) 2
Case 7 (2−ρw,A )2 (βw,A +γw,A ) + e2A (ψg,A + ψg,B ) + eA (φg,B − φg,A )
Case D2
Case 1 0
Case 2 0
Case 3 0
T0D < eB : (2−ρ w,B)2 (βw,B B+γ ) + (ψg,A + ψg,B )(T0D − T1D )2 + 2(ψg,A + ψg,B )(T0D − T1D )(T
( z +β e ) 2 D − TD)
Case 4 if 0 0
w,B w,B w,B
T0D ≥ eB : (2−ρ w,B)2 (βw,B B+γ ) + (ψg,A + ψg,B )(eB − T1D )2 + 2(ψg,A + ψg,B )(eB − T1D )(T
( z +β e ) 2 D −e )
if 0 B
w,B w,B w,B
if −T0D < eA : (2−ρ w,A)2 (βw,A A+γ ) + (ψg,A + ψg,B )(T2D + T0D )2 + 2(ψg,A + ψg,B )(T2D + T0D )(T
( z +β e ) 2 D − TD)
Case 5 0 0
w,A w,A w,A
if −T ≥ e :
D (zw,A +βw,A eA )2
+ (ψ + ψ )(T − e ) + 2(ψ + ψ )(T − e )(T + e )
D 2 D D
0 A (2−ρw,A )2 (βw,A +γw,A ) g,A g,B 2 A g,A g,B 2 A 0 A
(zw,B +βw,B eB )2
Case 6 (2−ρw,B )2 (βw,B +γw,B ) ≥0
(zw,A +βw,A eA )2
Case 7 (2−ρw,A )2 (βw,A +γw,A ) ≥0
zg,A zg,B
−
where φg, j = (2−ρ g,)j2 /ρ , ψg, j = (2−ρ )2g,/j(1−ρ ) , j = A, B, T
z β D = (2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B )
0 βg,A βg,B .
g, j g, j g, j g, j +
(2−ρg,A )2 /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B )
Since the profit may increase in the ECR cost, how about pricing as if the carrier has higher cost? As a result, a carrier
will be worse off if it unilaterally deviates from the NE prices. This can be seen from the definition of NE. Only when the
two carriers act in the same way will this strategy be beneficial to them.
Like in the monopoly case, here we also compare our pricing strategy with two traditional approaches. The laden
container-dominant strategy does not consider the ECR cost when pricing, hence the optimization problem for carrier
αg, j /(βg, j +γg, j )+cg, j
k is max k ( pkg,A , pkg,B ) = ( pkg,A − cg,A )dg,A
k + ( pk − c
g,B g,B )dg,B . The NE solution is pg, j =
k k∗
2−ρg, j , j = A, B. Carrier k’s
zg, j z
k∗ =
demand for shipment (g, j) is dg, j 2−ρg, j , j = A, B, and the number of empty containers to be shipped is | 2−g,A
ρ −
g,A
zg,B 2
zg, βg,A
2−ρg,B |. Therefore, the corresponding profit after deducting the repositioning cost is k∗ = j (2−ρ )2 (β +γ ) − ( 2−ρg,A +
j
g, j g, j g, j
βg,B
2−ρg,B )(eB T0D+ + eA T0D− ).
The second approach is discussed by Zhou and Lee (2009) who ignore the possibility of shipping waste and scrap. The
optimization problem for carrier k is max k ( pkg,A , pkg,B ) = ( pkg,A − cg,A )dg,A
k + ( pk − c
g,B g,B )dg,B − eA (dg,B − dg,A ) − eB (dg,A −
k k k + k
k )+ , and the NE solution is

dg,B
⎧
αg,A /(βg,A +γg,A )+cg,A +T0D αg,B /(βg,B +γg,B )+cg,B −T0D
⎪
⎪ , if − eA < T0D < eB
⎪
⎪ 2− ρ g,A 2− ρ g,B
⎨
αg,A /(βg,A +γg,A )+cg,A +eB αg,B /(βg,B +γg,B )+cg,B −eB
( pk∗
g,A , pg,B ) =
k∗
2−ρg,A 2−ρg,B
, if T0D ≥ eB
⎪
⎪
⎪
⎪
⎩ g,A g,A g,A g,A A , g,B g,B +γg,B )+cg,B +eA
α / ( β + γ ) +c −e α / ( β
if T0D ≤ −eA
2−ρg,A 2−ρg,B
The corresponding profit is

⎧ (zg,A −βg,A T0D )2 (zg,B +βg,B T0D )2
⎪
⎪ (2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B +γg,B ) if − eA < T0D < eB
⎨
(zg,A −βg,A eB ) 2
( z +β e ) 2
k∗ = (2−ρg,A ) (βg,A +γg,A ) + (2−ρg,B )2 (βg,B B+γ ) ifT0D ≥ eB
⎪
2
⎪
g,B g,B g,B
⎩ (zg,A +βg,A eA )2 ( z − β e )2
(2−ρg,A )2 (βg,A +γg,A ) + (2−ρg,B )2 (βg,B A+γ ) ifT0D ≤ −eA
g,B g,B g,B
Let D
1
and D 2
denote the differences in profit between our approach and the two traditional approaches. The results
are shown in Table 5.
Fig. 5. Profit difference between our model and the laden container-dominant model in the case of duopoly.
a b
Compared with the laden container-dominant strategy, our approach generates more profit in Case 1, Case 4 and Case 5.
The effect of γ g, A on profit difference D
1 in Case 2 and Case 6 is shown in Fig. 5(a) and (b).
10 It can be seen that D is
1
increasing in γ g, A and our approach generates less profit only when γ g, A is very small.11 This means that as the competition
intensifies in the headhaul, it is more important for carriers to take the ECR cost into consideration when making pricing
decisions.
In Case 2 (with Case 3 being its symmetric case), both approaches transport goods shipments (g, A) and (g, B), and
reposition empty containers. Therefore, the total profit for carrier k is k = ( pkg,A − cg,A − eB )(αg,A − βg,A pkg,A ) + ( pkg,B − cg,B +
eB )(αg,B − βg,B pkg,B ). We will compare the two sources of profit in two approaches one by one.
αg,A /(βg,A +γg,A )+cg,A +eB α /(β +γg,A )+cg,A
First, pg, A in our approach is 2−ρg,A . And pg, A in the laden container-dominant strategy is g,A g,A 2−ρg,A .
αg,A /βg,A +cg,A +eB
Neither is higher than the price if we want to maximize the profit from shipment (g, A), which is 2 . Therefore,
the profit from shipment (g, A) generated by our approach is greater. Besides, as γ g, A increases, pg, A in both approaches will
e
decrease. And since the profit is a concave function of price and the price difference between the two approaches, 2−ρB , is
g,A
increasing in γ g, A , the profit difference will be greater as γ g, A increases (see Fig. 6(a)).
αg,B /(βg,B +γg,B )+cg,B −eB
Second, pg, B in our approach is 2−ρg,B , which is not higher than the price if we want to maximize the profit
αg,B /βg,B +cg,B −eB α /(β +γg,B )+cg,B
from shipment (g, B), 2 . And pg, B in the laden container-dominant strategy is g,B g,B 2−ρg,B , which can be
αg,B /βg,B +cg,B −eB
higher or lower than 2 . Since the profit from shipment (g, B) is concave in pg, B , the profit in our approach can
be greater or less than that in the laden container-dominant strategy, and the profit difference will not change in γ g, A (see
Fig. 6(b)).
10
In practice, competition for goods shipments in the headhaul is fierce and more important to the carriers, so we only study the impact of γ g, A on the
profit difference here.
11
In practice, the situation where competition intensity in the headhaul is low while that in the backhaul is high is seldom.
(a) case 4 and TD0 < eB (b) case 4 and TD0 ≥ eB
αg,A=48000,αg,B=40000,αw,A=100000,αw,B=100000,
βg,A=5,βg,B=20,βw,A=βw,B=200,
0
400
γg,B=γw,A=γw,B=10,
cg,A=cg,B=800,cw,A=cw,B=1000,eA=eB=750
2 (thousand)
Δ2D (thousand)
200
−400
ΔD
αg,A=50000,αg,B=41000,αw'A=100000,αw'B=100000,
0
βg,A=13,βg,B=36,βw,A=βw'B=200,
γg,B=15,γw,A=γw,B=10,
−800
−200
cg,A=cg,B=800,cw,A=cw,B=1000,eA=eB=750
0 5 10 15 20 25 0 10 20 30 40 50
γg,A γg,A
Fig. 7. Profit difference between our model and Zhou and Lee’s model in the case of duopoly.
a b c
Fig. 8. The relationship between the profit from shipment (g, A) and price pg, A .
To sum up, D 1 is composed of two parts: the first part is positive and increases in γ g, A . The second part can be positive
or negative, but does not change with γ g, A . Therefore, we can say that D 1
is increasing in γ g, A and only when γ g, A is
small enough can D 1
be negative, which is consistent with the numerical results in Fig. 5(a). Case 6 and Case 7 can be
analyzed in a similar way.
Besides, as long as ρ i, j of shipping goods in the headhaul is higher than that in the backhaul, that is ρ g, A > ρ g, B for Case
γ
2 and Case 6 and ρ g, B > ρ g, A for Case 3 and Case 7, our approach will always generate more profit.12 Here ρi, j = β +i, γj is
i, j i, j
the ratio between the attracted demand from competitor and the total increase in demand if one carrier reduces its price
by some amount.
Compared with the approach discussed by Zhou and Lee (2009), our approach generates more profit in Case 6 and Case 7,
and in the first three cases, the profits are the same, which is quite similar to the monopoly model. But the profit difference
can be positive or negative in Case 4 and Case 5. The effect of γ g, A on D 2
in Case 4 is shown in Fig. 7(a) and (b). It can
be seen that D 2
first increases then decreases in γ g, A when T0D < eB , and D 2
first decreases then increases in γ g, A when
T0D ≥ eB . This means that when competition exists, shipping waste and scrap may not be profitable for either carrier.
In Case 4 and when T0D < eB , the carriers in our approach will transport goods shipments (g, A), (g, B) and waste shipment
(w, B), while the carriers in Zhou and Lee’s approach will only transport goods shipments (g, A) and (g, B). We decompose
the total profit into three parts and discuss them one by one.
αg,A /(βg,A +γg,A )+cg,A +T1D
First, pg, A in our approach is 2−ρg,A , which is lower than the price in Zhou and Lee’s approach of
αg,A /(βg,A +γg,A )+cg,A +T0D 13
2−ρg,A . Based on Fig. 8, the profit from transporting shipment (g, A) in our approach can be greater or
less than that in Zhou and Lee’s approach. However, as γ g, A increases, pg, A decreases in both approaches, and the situation
described in Fig. 8(a) will finally come true. Since the profit is a concave function of price and the price difference between
T0D −T1D
the two approaches, 2−ρg,A , is increasing in γg,A ,14 the profit difference is decreasing in γ g, A .
ρg,A ρg,B ρg,A

12
φg,A − φg,B = (2−ρg,Azg,A)2 /ρg,A − (2−ρg,Bzg,B)2 /ρg,B = 2−zg,A zg,B zg,A zg,B
ρg,A 2−ρg,A − 2−ρg,B 2−ρg,B and for Case 2 and 6, we have 2−ρg,A > 2−ρg,B . Therefore, if ρ g, A > ρ g, B or 2−ρg,A
>
ρg,B
2−ρg,B
, we must have φ g, A > φ g, B and then D
1 > 0.
βw,B
2−ρw,B αw,B αw,B
13
T0D = T1D + βg,A β (T1D + βw,B − cw,B ) > T1 if T1 > cw,B − βw,B .
D D
2−ρg,A + 2−g,B
ρ g,B
βw,B
T0D −T1D 2−ρw,B αw,B
14
2−ρg,A
= β (T1D + βw,B − cw,B ), and ρ g, A and T1D are both increasing in γ g, A .
βg,A +(2−ρg,A ) 2−g,B
ρ g,B
αg,B /(βg,B +γg,B )+cg,B −T1D

Second, pg, B in our approach is 2−ρg,B , which is higher than the price in Zhou and Lee’s approach of
αg,B /(βg,B +γg,B )+cg,B −T0D
2−ρg,B . Both are lower than the optimal price if we want to maximize the profit from shipment (g, B), which
αg,B /βg,B +cg,B
is 2 . Since the profit is a concave function of price, the profit from shipment (g, B) generated by our approach is
greater.
Third, the profit from transporting shipment (w, B) in our approach is negative, and since pw, B is decreasing in γ g, A , the
profit is also decreasing in γ g, A , while the ECR cost is zero in Zhou and Lee’s approach.
The final effect of γ g, A on the profit difference D 2
depends on the above three parts, and Fig. 7(a) is one possible result.
Note that as γ g, A changes, Case 4 may evolve into the other cases. Therefore, with different parameters, D 2
may only
increase in γ g, A or only decrease in γ g, A . Similar situations exist in Case 4 and T0D ≥ eB . Case 5 is symmetric to Case 4, so
we omit the analysis here.
However, as long as ρ i, j of shipping goods in the backhaul is greater than that in the headhaul, that is ρ g, B > ρ g, A for
Case 4 and ρ g, A > ρ g, B for Case 5, our approach will always generate more profit.15
In the case of duopoly, shipping waste in addition to shipping goods will increase market competition. Yet shipping waste
is beneficial to carriers if the loss from shipping waste is lower than the cost of repositioning empty containers. The final
effect on the profit depends on whether or not the positive effect outweighs the negative effect. Hence, the result that our
approach may generate less profit under some circumstances is understandable. However, on severely imbalanced routes
like the Asia–Europe route and the transpacific route, shipping waste and scrap will be beneficial to carriers (see Case 6 and
Case 7 in Table 5). Besides, the practice promotes the recycling and reuse of renewable resources. Shipping waste and scrap
is widely adopted by practitioners, hence it should not be neglected by researchers studying the ECR problem.
6. Extensions
6.1. N symmetric carriers
To obtain insights from the model with competition, we considered only two carriers in Section 5. But we can easily
prove the existence and uniqueness of NE and derive the NE solution for n symmetric carriers. In this case, the demand

function of shipment (i, j) for carrier k is di,k j = αi, j − βi, j pki, j + nl=k γi, j ( pli, j − pki, j ), ∀i, j. This means that when carrier k cuts
the price of shipment (i, j) by one unit, the demand will increase by (βi, j + (n − 1 )γi, j ): β i, j are the increase in demand
triggered by the lower price and (n − 1 )γi, j are the demand attracted from its (n − 1 ) competitors. We only need to use
(n − 1 )γi, j to replace γ i, j for all i, j in Proposition 5 to get the NE prices for n symmetric carriers.
6.2. Asymmetric carriers
In Section 5, we only consider symmetric carriers. If two carriers are asymmetric, we can still prove the existence and
uniqueness of NE. However, the NE solution is not symmetric and can be quite complicated.16
Table 6 gives carriers’ pricing strategies under the asymmetric game. Note that all the parameters for two carriers are
the same except that αg,A1 = 50,000 while α 2 ranges from 20,000 to 115,000. It can be seen that two carriers may take
g,A
different strategies: Carrier 1 always seeks a balance of goods through shipment pricing while Carrier 2 takes different
strategies depending on the value of αg,A2 . When α 2 is small, Carrier 2 ships waste shipment (w, A) to achieve flow balance
g,A
and then as αg,A
2 increases, Carrier 2 will seek a balance of goods through shipment pricing. When α 2 is too large, Carrier 2
g,A
first ships waste shipment (w, B) to achieve flow balance and then ships waste shipment and repositions empty containers
to achieve flow balance. Both carriers benefit from the increase in the potential demand, although only Carrier 2’s potential
demand increases.
7. Conclusions
The large body of research on ECR has seldom considered shipping waste and scrap, which is an environmentally-friendly
and cost-effective alternative approach to achieve flow balance. In this paper, we study the optimal pricing strategy for car-
riers in a monopoly and duopoly market with waste shipments and ECR. Depending on the market conditions and cost
structures, the carrier should adopt one of four strategies: seeking a balance of goods through shipment pricing; reposition-
ing empty containers to achieve flow balance; shipping waste to achieve flow balance; shipping waste and repositioning
empty containers to achieve flow balance. We also investigate how the profit is affected by price sensitivity, cost structure
and competition intensity.
z z ρ ρ
( βg,A + βg,B )( 2−g,B − 2−g,A )
If T0D < eB : T , therefore, if ρ g, B > ρ g, A , we must have T
ρ ρ
15 D − TD = g,A g,B g,B g,A D > T D and then D > 0. If T D ≥ e : T D −e ≥
0 0 βg,A βg,B 2−ρg,A 2−ρg,B 0 0 2 0 B 0 B
( (2−ρ + )( βg,A + βg,B )
g,A ) /(1−ρg,A ) (2−ρg,B )2 /(1−ρg,B )
2
T
0
D − T D > 0 if ρ
0 g, B > ρ g, A , and then 2 > 0.
D
16
Since each carrier’s best response function is a piece-wise function with seven segments, the NE solution is a piece-wise function with 49 segments.
Table 6
NE results for two asymmetric carriers.
No αg,A
2
Carrier 1 Carrier 2
( g,A ,
p1∗ g,B ,
p1∗ w,A ,
p1∗ p1∗
w,B ) 1∗
Container flow ( g,A ,
p2∗ g,B ,
p2∗ w,A ,
p2∗ p2∗
w,B ) 2∗
Container flow
1 20000 (943, 1123, 296, 300) 15022222 (g, A) (g, B) (507, 1226, 289, 300) 5835019 (g, A) (g, B) (w, A)
2 25000 (957, 1117, 299, 300) 15298614 (g, A) (g, B) (579, 1218, 296, 300) 7140248 (g, A) (g, B) (w, A)
3 30000 (975, 1108, 300, 300) 15577526 (g, A) (g, B) (663, 1197, 300, 300) 8720383 (g, A) (g, B)
4 35000 (995, 1095, 300, 300) 15858957 (g, A) (g, B) (762, 1162, 300, 300) 10478005 (g, A) (g, B)
5 40000 (1016, 1083, 300, 300) 16142908 (g, A) (g, B) (860, 1127, 300, 300) 12396876 (g, A) (g, B)
6 45000 (1037, 1070, 300, 300) 16429378 (g, A) (g, B) (959, 1092, 300, 300) 14476997 (g, A) (g, B)
7 50000 (1057, 1057, 300, 300) 16718367 (g, A) (g, B) (1057, 1057, 300, 300) 16718367 (g, A) (g, B)
8 55000 (1078, 1044, 300, 300) 17009877 (g, A) (g, B) (1156, 1022, 300, 300) 19120988 (g, A) (g, B)
9 60000 (1098, 1032, 300, 300) 17303905 (g, A) (g, B) (1254, 987, 300, 300) 21684858 (g, A) (g, B)
10 65000 (1119, 1019, 300, 300) 17600454 (g, A) (g, B) (1352, 952, 300, 300) 24409977 (g, A) (g, B)
11 70000 (1140, 1006, 300, 300) 17899521 (g, A) (g, B) (1451, 917, 300, 300) 27296347 (g, A) (g, B)
12 75000 (1157, 997, 300, 299) 18201109 (g, A) (g, B) (1536, 896, 300, 296) 30360202 (g, A) (g, B) (w, B)
13 80000 (1171, 991, 300, 296) 18505215 (g, A) (g, B) (1607, 888, 300, 289) 33698965 (g, A) (g, B) (w, B)
14 85000 (1185, 985, 300, 294) 18811842 (g, A) (g, B) (1679, 880, 300, 281) 37328871 (g, A) (g, B) (w, B)
15 90000 (1199, 979, 300, 291) 19120988 (g, A) (g, B) (1750, 872, 300, 273) 41249920 (g, A) (g, B) (w, B)
16 95000 (1212, 973, 300, 289) 19432653 (g, A) (g, B) (1821, 864, 300, 266) 45462113 (g, A) (g, B) (w, B)
17 100000 (1226, 967, 300, 286) 19746838 (g, A) (g, B) (1893, 856, 300, 258) 49965449 (g, A) (g, B) (w, B)
18 105000 (1240, 961, 300, 284) 20063542 (g, A) (g, B) (1964, 849, 300, 251) 54759928 (g, A) (g, B) (w, B)
19 110000 (1253, 956, 300, 282) 20382766 (g, A) (g, B) (2032, 845, 300, 247) 59853528 (g, A) (g, B) (w, B) empty containers from B
20 115000 (1265, 952, 300, 282) 20704510 (g, A) (g, B) (2096, 844, 300, 247) 65273351 (g, A) (g, B) (w, B) empty containers from B
αg,A
1
= 50000, αg,B
1
= αg,B
2
= 50000, αw,A
1
= αw,A
2
= 60000, αw,B
1
= αw,B
2
= 60000,
βg,A
1
= βg,A
2
= 30, βg,B
1
= βg,B
2
= 30, βw,A
1
= βw,A
2
= 200, βw,B
1
= βw,B
2
= 200,
γg,A
1
= γg,A
2
= 10, γg,B
1
= γg,B
2
= 10, γw,A
1
= γw,A
2
= 100, γw,B
1
= γw,B
2
= 100,
1
cg,A = cg,A
2
= 600, cg,B
1
= cg,B
2
= 600, cw,A
1
= cw,A
2
= 600, cw,B
1
= cw,B
2
= 600, e1A = e2A = 400, e1B = e2B = 400.
Comparing our model with two traditional models, we find that (1) in a market with one carrier or if some service
route is dominated by a shipping alliance, our approach always generates more profit; (2) in a market with competition,
shipping waste and scrap will intensify the market competition and may reduce profit under some circumstances. However,
on severely imbalanced routes like the Asia–Europe route and the transpacific route, our approach still generates more
profit. Besides, shipping waste and scrap is a widely adopted practice to offset the ECR cost in the shipping industry, hence
it should not be neglected by researchers studying the ECR problem.
One limitation of our work is that we only considered a two-port closed system, which simplifies the complicated ship-
ping networks seen in the real life. One could study a multi-port system with routing decisions, but the analysis would be
far more challenging. Besides, we used a deterministic linear model to describe the demand function, which fails to capture
the uncertainty in the shipping market. Stochastic models like the additive model, multiplicative model and logit model can
be used instead in future research.
Acknowledgment
The work described in this paper was fully supported by a grant from the Research Grants Council of the HKSAR, China,
T32-620/11.
Appendix
Proof of Proposition 1. Define two new problems:

P M : max ( pg,A , pg,B , pw,A , pw,B ) = ( pi, j − ci, j )di, j − eA (dg,B + dw,B − dg,A − dw,A )
j i
subject to:
dg,B + dw,B − dg,A − dw,A ≥ 0
di, j = αi, j − βi, j pi, j ∀i, j
di, j , pi, j ≥ 0 ∀i, j

P M : max ( pg,A , pg,B , pw,A , pw,B ) = ( pi, j − ci, j )di, j − eB (dg,A + dw,A − dg,B − dw,B )
j i
subject to:
dg,A + dw,A − dg,B − dw,B ≥ 0
di, j = αi, j − βi, j pi, j ∀i, j

di, j , pi, j ≥ 0 ∀i, j
Let p∗ , p and < uline > p < /uline > denote the optimal solutions to the original problem denoted by PM and two
new problems P M and PM , respectively. The corresponding demand and optimal values of these three problems are d∗ , d,

d and ∗ , , . Then we must have ∗ = max(, ). (Since p is feasible to PM , we have ∗ ≥ j i ( pi, j − ci, j )di, j −

eA (dg,B + dw,B − dg,A − dw,A )+ − eB (dg,A + dw,A − dg,B − dw,B )+ = j i ( pi, j − ci, j )di, j − eA (dg,B + dw,B − dg,A − dw,A ) = . Simi-
larly, we have ∗ ≥ , then ∗ ≥ max(, ). Besides, if dg,B ∗ + d∗
w,B
∗ − d∗
− dg,A w,A
≥ 0, then p∗ is feasible to P M , so we
∗
have ≥ j i ( pi, j − ci, j )di,∗ j − eA (dg,B
∗ + d∗
w,B
∗ − d ∗ ) = ∗ . And if d ∗ + d ∗
− dg,A w,A g,B w,B
∗ − d∗
− dg,A w,A
< 0, then p∗ is feasible to
∗
P , so we have ≥ j i ( pi, j − ci, j )di, j − eB (dg,A + dw,A − dg,B − dw,B ) = . Therefore, ≤ max(, ).)
M ∗ ∗ ∗ ∗ ∗ ∗ ∗
P M is a convex programming problem, and we can use Karush–Kuhn–Tucker conditions to solve it. The Lagrangian

is L( pi, j ≥ 0, μl ≥ 0 ) = j i ( pi, j − ci, j )(αi, j − βi pi, j ) − eA (αg,B − βg,B pg,B + αw,B − βw,B pw,B − αg,A + βg,A pg,A − αw,A +
α α α α
βw,A pw,A ) − μ1 ( pg,A − βg,A ) − μ2 ( pg,B − βg,B ) − μ3 ( pw,A − βw,A ) − μ4 ( pw,B − βw,B ) − μ5 (αg,A − βg,A pg,A + αw,A − βw,A pw,A −
g,A g,B w,A w,B
αg,B + βg,B pg,B − αw,B + βw,B pw,B ). Taking the Karush–Kuhn–Tucker conditions, we have
⎧ ∂L
⎪
⎪ ∂ pg,A = αg,A − 2βg,A pg,A + βg,A (cg,A − eA ) − μ1 + βg,A μ5 = 0
⎪
⎪
⎪
⎪
∂L
∂ pg,B = αg,B − 2βg,B pg,B + βg,B (cg,B + eA ) − μ2 − βg,B μ5 = 0
⎪
⎪
⎪
⎪ ∂L = α
⎪ w,A − 2βw,A pw,A + βw,A (cw,A − eA ) − μ3 + βw,A μ5 = 0
⎪ ∂p
⎨ ∂w,A
∂ pw,B = αw,B − 2βw,B pw,B + βw,B (cw,B + eA ) − μ4 − βw,B μ5 = 0
L
(A.1)
⎪
⎪μ 1 (αg,A − βg,A pg,A ) = 0
⎪
⎪
⎪
⎪μ2 (αg,B − βg,B pg,B ) = 0
⎪
⎪μ3 (αw,A − βw,A pw,A ) = 0
⎪
⎪
⎪
⎩μ4 (αw,B − βw,B pw,B ) = 0
⎪
μ5 (dg,B + dw,B − dg,A − dw,A ) = 0
Obviously, only the following five cases can happen:
(1) dg,A > 0, dg,B > 0, dw,A = 0, dw,B = 0, dg,B + dw,B = dg,A + dw,A
(2) dg,A > 0, dg,B > 0, dw,A = 0, dw,B = 0, dg,B + dw,B > dg,A + dw,A
(3) dg,A > 0, dg,B > 0, dw,A = 0, dw,B > 0, dg,B + dw,B = dg,A + dw,A
(4) dg,A > 0, dg,B > 0, dw,A > 0, dw,B = 0, dg,B + dw,B = dg,A + dw,A
(5) dg,A > 0, dg,B > 0, dw,A > 0, dw,B = 0, dg,B + dw,B > dg,A + dw,A
Based on (A.1), we can get the optimal pricing for P M under different cases, which is
( pg,A , pg,B , pw,A , pw,B )
⎧ αg,A +c +T αg,B

⎪ βg,A g,A 0 βg,B +cg,B −T0 α α α α
⎪
⎪ , , βw,A , βw,B if − min cw,A − βw,A , eA < T0 < cw,B − βw,B
⎪
⎪
2 2 w,A w,B w,A w,B
⎪
⎪ α αg,B
⎪
⎪
g,A
βg,A +cg,A −eA βg,B +cg,B +eA α α α
⎪
⎪ , , βw,A , βw,B if eA ≤ −T0 , eA < cw,A − βw,A
⎪
⎪
2 2 w,A w,B w,A
⎪
⎨ αg,A +cg,A +T1 αg,B αw,B
βg,A βg,B +cg,B −T1 α βw,B +cw,B −T1 α α

= , , βw,A , if cw,B − βw,B ≤ T1 ≤ βg,A − cg,A
⎪
⎪ αg,A
2 2 w,A 2

w,B g,A
⎪
⎪ αg,B αw,A
⎪ βg,A g,A −T2
⎪ +c βg,B +cg,B +T2 βw,A +cw,A −T2 α α α
⎪
⎪ , , , βw,B if T2 < eA , cw,A − βw,A ≤ T2 ≤ βg,B − cg,B
⎪
⎪
2 2 2 w,B w,A g,B
⎪
⎪

⎪
⎪
α g,A
+cg,A −eA
αg,B
βg,B +cg,B +eA
αw,A
βw,A +cw,A −eA α α α
⎩ βg,A 2
, 2
, 2
, βw,B if cw,A − βw,A ≤ eA ≤ min βg,B − cg,B , T2
w,B w,A g,B
PM is quite similar to P M and the optimal pricing can be obtained in the same way. Then we only need to compare
the profits in these two problems and find the optimal solution to the original problem PM . The comparison process is
straightforward and thus is omitted.

Then we can calculate the corresponding demand and profit by di,∗ j = αi, j − βi, j p∗i, j and ∗ = j i ( p∗i, j − ci, j )di,∗ j −
eA (dg,B
∗ + d∗
w,B − dg,A − dw,A ) − eB (dg,A + dw,A − dg,B − dw,B ) , which are summarized in Table 2.
∗ ∗ + ∗ ∗ ∗ ∗ +
Proof of Proposition 2. This proposition follows from the results in Table 2.
Proof of Proposition 3. We only analyze the impact of β g, A and β w, A , the impact of β g, B and β w, B can be analyzed in a
d∗2 d∗2
∂ ∗ = ∂ di, j 2di, j − i , j .
∗ ∗
similar way. Since ∗ = j i βi, j , we have ∂β i ∂β β
j
i, j
2
i , j i , j i, j β
i ,j
(1)
∂ ∗ ∂ dg,A
∗ ∗
2dg,A ∂ dg,B
∗ ∗
2dg,B ∗2
dg,A ∗
dg,A p∗g,A
= + − 2 =− < 0 (Case 1 )
∂βg,A ∂βg,A βg,A ∂βg,A βg,B βg,A βg,A
∂ ∗ ∂ dg,A
∗ ∗
2dg,A ∗2
dg,A ∗
dg,A p∗g,A
= − 2 =− < 0 (Case 2 and Case 6 )
∂βg,A ∂βg,A βg,A βg,A βg,A
∂ ∗ ∂ dg,A
∗ ∗
2dg,A ∗2
dg,A ∗
dg,A p∗g,A
= − 2 =− < 0 (Case 3 and Case 7 )
∂βg,A ∂βg,A βg,A βg,A βg,A
∂ ∗ ∂ dg,A
∗ ∗
2dg,A ∂ dg,B
∗ ∗
2dg,B ∂ dw,B
∗ ∗
2dw,B ∗2
dg,A ∗
dg,A p∗g,A
= + + − 2 =− < 0 (Case 4 )
∂βg,A ∂βg,A βg,A ∂βg,A βg,B ∂βg,A βw,B βg,A βg,A
∂ ∗ ∂ dg,A
∗ ∗
2dg,A ∂ dg,B
∗ ∗
2dg,B ∂ dw,A
∗ ∗
2dw,A ∗2
dg,A ∗
dg,A p∗g,A
= + + − 2 =− < 0 (Case 5 )
∂βg,A ∂βg,A βg,A ∂βg,A βg,B ∂βg,A βw,A βg,A βg,A
(2)
∂ ∗ ∂ dg,A
∗ ∗
2dg,A ∂ dg,B
∗ ∗
2dg,B ∂ dw,A
∗ ∗
2dw,A ∗2
dw,A ∗
dw,A p∗w,A
= + + − 2 =− < 0 (Case 5 )
∂βw,A ∂βw,A βg,A ∂βw,A βg,B ∂βw,A βw,A βw,A βw,A
∂ ∗ ∂ dw,A
∗ ∗
2dw,A ∗2
dw,A ∗
dw,A p∗w,A
= − 2 =− < 0 (Case 7 )
∂βw,A ∂βw,A βw,A βw,A βw,A
∂ ∗
= 0 (Case 1, Case 2, Case 3, Case 4 and Case 6 )
∂βw,A
Proposition 3 follows from these results.
Proof of Proposition 4. We only analyze the impact of cg, A , cw, A and eA ; the impact of cg, B , cw, B and eB can be analyzed
d∗2 ∗ ∂ d∗ 2d∗
in a similar way. Since ∗ = j i βi, j , we have ∂∂c = j i ∂ c i, j β i, j .
i, j i , j i , j i, j
(1)
∂ ∗ βg,B βg,A
=− d∗ − d∗ = −dg,A∗
< 0 (Case 1 )
∂ cg,A βg,A + βg,B g,A βg,A + βg,B g,B
∂ ∗ βg,B + βw,B βg,A βg,A
=− d∗ − d∗ − d∗ = −dg,A
∗
< 0 (Case 4 )
∂ cg,A βg,A + βg,B + βw,B g,A βg,A + βg,B + βw,B g,B βg,A + βg,B + βw,B w,B
∂ ∗ βg,B + βw,A βg,A βg,A
=− d∗ − d∗ + d∗ = −dg,A
∗
< 0 (Case 5 )
∂ cg,A βg,A + βg,B + βw,A g,A βg,A + βg,B + βw,A g,B βg,A + βg,B + βw,A w,A
∗
∂ ∗ βg,A 2dg,A
=− ∗
= −dg,A < 0 (Case 2, Case 3, Case 6 and Case 7 )
∂ cg,A 2 βg,A
(2)
∂ ∗ βw,A βw,A βg,A + βg,B
= d∗ − d∗ − d∗ = −dw,A
∗
< 0 (Case 5 )
∂ cw,A βg,A + βg,B + βw,A g,A βg,A + βg,B + βw,A g,B βg,A + βg,B + βw,A w,A
∗
∂ ∗ βw,A 2dw,A
=− ∗
= −dw,A < 0 (Case 7 )
∂ cw,A 2 βw,A
∂ ∗
∂ cw,A
(3)
∗ ∗
∂ ∗ βg,A 2dg,A βg,B 2dg,B
= − = −q∗A < 0 (Case 3 )
∂ eA 2 βg,A 2 βg,B
∗ ∗ ∗
∂ ∗ βg,A 2dg,A βg,B 2dg,B βw,A 2dw,A
= − + = −q∗A < 0 (Case 7 )
∂ eA 2 βg,A 2 βg,B 2 βw,A
∂ ∗
∂ eA
Proof of Theorem 1. The result is proven in three steps:
(1) Existence of NE
Debreu (1952), Glicksberg (1952) and Fan (1952) suggest that “Game G = (Si , πi )ni=1 has a pure strategy NE if the
strategy space for each player Si is convex and compact; the payoff function π i is quasi_concave in si ; the payoff
function π i is a continuous function in s.”
For carrier k, pki, j is in the interval [0, pi, j_max ]. pi, j_max = αi, j /βi. j , which solves di,1 j ( p1i, j , p2i, j ) = 0 and di,2 j ( p1i, j , p2i, j ) = 0,

so the strategy space is convex and compact. The payoff function is concave since j i ( pki, j − ci, j )di,k j , −(dg,B k + dk
w,B
−
k − d k )+ and − (d k + d k
dg,A k − d k )+ are concave in ( pk , pk , pk , pk ). k is a nonnegative weighted sum
− dg,B
w,A g,A w,A w,B g,A g,B w,A w,B
of three concave functions, which is also concave. Obviously, the payoff function is continuous. Therefore, we can
conclude that there exists at least one pure strategy NE in our problem.
(2) Symmetric NE
Cachon and Netessine (2004) suggest that for a symmetric game satisfying the three conditions listed in the existence
of NE argument above, there exists at least one pure strategy symmetric NE.
(3) Uniqueness of NE
Cachon and Netessine (2004) point out that “If the best response mapping is a contraction on the entire strategy
space, there is a unique NE in the game.”
Given carrier 2’s price decision ( p2g,A , p2g,B , p2w,A , p2w,B ), carrier 1’s best response function is
( p1g,A , p1g,B , p1w,A , p1w,B ) = f1 ( p2g,A , p2g,B , p2w,A , p2w,B )
⎧ α +γ p2
⎪
⎪
g,A g,A g,A
βg,A +γg,A +cg,A +T0
2
αg,B +γg,B p2g,B
2
⎪
⎪ ,
α + γ p 2
, β +γ w,A , β +γ w,B
w,A w,A α w,B + γ w,B p 2
⎪
⎪ 2 2
⎪
w,A w,A w,B w,B
⎪
⎪
⎪
⎪ α + γ p2
αw,B +γw,B p2w,B
⎪
⎪ i f − min ( cw,A −
w,A w,A w,A
βw,A +γw,A , e A ) < T 2
< min c w,B − βw,B +γw,B , e B
⎪
⎪
0
⎪ αg,A +γg,A p2g,A

⎪
⎪ αg,B +γg,B p2g,B

⎪
⎪ +cg,A +eB +cg,B −eB α +γ p2 αw,B +γw,B p2
⎪ βg,A +γg,A2
⎪
β +γ
, g,B g,B2 , β +γ w,A , β +γ w,B
w,A w,A
⎪
⎪ w,A w,A w,B w,B
⎪
⎪
⎪
⎪ α + γ p 2
⎪
⎪ i f eB ≤ T02 , eB < cw,B − β +γ w,B
w,B w,B
⎪
⎪ w,B w,B

⎪

⎪
⎪ βg,A +γg,A +cg,A −eA βg,B +γg,B +cg,B +eA αw,A +γw,A p2w,A αw,B +γw,B p2w,B
⎪
⎪ , , β +γ , β +γ
⎪
⎪ 2 2 w,A w,A w,B w,B
⎪
⎪
⎪
⎪ αw,A +γw,A p 2
⎪
⎪ i f eA ≤ −T02 , eA < cw,A − β +γ w,A
⎪
⎪ w,A w,A
⎪
⎪
⎪ αg,B +γg,B p2g,B αw,B +γw,B p2w,B
⎪
⎨ βg,A +γg,A +cg,A +T1
2
,
2
,
αw,A +γw,A p2w,A
,
2
2 2 βw,A +γw,A 2
=
⎪
⎪ αw,B +γw,B p2 αg,A +γg,A p2
⎪
⎪ i f T12 < eB , cw,B − β +γ w,B ≤ T12 ≤ β +γ g,A − cg,A
⎪
⎪ w,B w,B
⎪
g,A g,A
⎪
⎪
⎪
⎪
αg,A +γg,A p2g,A
+cg,A −T22
αg,B +γg,B p2g,B
+cg,B +T22
α w,A + γ p2
w,A w,A
+cw,A −T22 α +γ p2
⎪
⎪
β g,A +γg,A
,
β g,B +γg,B
,
β w,A +γw,A
, β +γ
w,B w,B w,B
⎪
⎪ 2 2 2
⎪
w,B w,B
⎪
⎪
⎪
⎪ αw,A +γw,A p 2 αg,B +γg,B p 2
⎪
⎪ i f T22 < eA , cw,A − β +γ w,A ≤ T22 ≤ β +γ g,B − cg,B
⎪
⎪
w,A w,A g,B g,B

⎪
⎪
⎪ αg,A +γg,A p2g,A αg,B +γg,B p2g,B α
⎪ βg,A +γg,A +cg,A +eB βg,B +γg,B +cg,B −eB αw,A +γw,A p2w,A w,Bβw,B +w,Bγw,Bw,B +cw,B −eB
+γ p2
⎪
⎪ , , β +γ ,
⎪
⎪ 2 2 2
⎪
⎪
w,A w,A

⎪
⎪
⎪
⎪ αw,B +γw,B p2
i f cw,B − β +γ w,B ≤ eB ≤ min β +γ g,A − cg,A , T12
αg,A +γg,A p 2
⎪
⎪
⎪
⎪ α +γ p2
w,B w,B g,A g,A

⎪
⎪ βg,A +γg,A +cg,A −eA βg,B +γg,B +cg,B +eA βw,A +γw,A +cw,A −eA αw,B +γw,B p2w,B
⎪
g,A g,A g,A αw,A +γw,A p2w,A
⎪
⎪ , , , β +γ
⎪
⎪ 2 2 2
⎪
w,B w,B
⎪
⎪
⎪
⎩ i f cw,A − β +γ
αw,A +γw,A p2w,A
≤ eA ≤ min β +γ
αg,B +γg,B p2g,B
− cg,B , T22
w,A w,A g,B g,B
(αg,A + γg,A p2g,A − (βg,A + γg,A )cg,A ) − (αg,B + γg,B p2g,B − (βg,B + γg,B )cg,B )
where T02 = ,
βg,A + γg,A + βg,B + γg,B
(αg,A + γg,A pg,A − (βg,A + γg,A )cg,A ) − (αg,B + γg,B pg,B − (βg,B + γg,B )cg,B ) − (αw,B + γw,B p2w,B − (βw,B + γw,B )cw,B )
2 2
T12 = ,
βg,A + γg,A + βg,B + γg,B + βw,B + γw,B
(αg,B + γg,B p2g,B − (βg,B + γg,B )cg,B ) − (αg,A + γg,A p2g,A − (βg,A + γg,A )cg,A ) − (αw,A + γw,A p2w,A − (βw,A + γw,A )cw,A )
T22 = .
βg,A + γg,A + βg,B + γg,B + βw,A + γw,A
The best response function for carrier 1 is a piece-wise linear function. Carrier 2 also has such a piece-wise linear
function ( p2g,A , p2g,B , p2w,A , p2w,B ) = f2 ( p1g,A , p1g,B , p1w,A , p1w,B ). Then the best response mapping can be written as
f ( p1g,A , p1g,B , p1w,A , p1w,B , p2g,A , p2g,B , p2w,A , p2w,B ) = ( f1 ( p2g,A , p2g,B , p2w,A , p2w,B ), f2 ( p1g,A , p1g,B , p1w,A , p1w,B ))
Now we need to prove that this mapping is a contraction mapping.
Let f ( p1g,A , p1g,B , p1w,A , p1w,B , p2g,A , p2g,B , p2w,A , p2w,B ) = (g1 , g2 , g3 , g4 , g5 , g6 , g7 , g8 ) and define the following matrix H, where
∂ gi ∂g ∂g ∂g ∂g ∂g ∂g ∂g
the entry hi1 = , hi2 = 1i , hi3 = 1 i , hi4 = 1 i , hi5 = 2i , hi6 = 2i , hi7 = 2 i , hi8 = 2 i , for i =
∂ p1g,A ∂ pg,B ∂ pw,A ∂ pw,B ∂ pg,A ∂ pg,B ∂ pw,A ∂ pw,B
1, 2, ..., 8.
To show the mapping is a contraction mapping, it suffices to show that H < 1 for any one matrix norm. The
best response mapping is a piece-wise linear function with 49 segments, and we only show that H∞ < 1 in one
segment.
(αg,B +γg,B p1g,B −(βg,B +γg,B )cg,B )−(αg,A +γg,A p1g,A −(βg,A +γg,A )cg,A )−(αw,A +γw,A p1w,A −(βw,A +γw,A )cw,A )
Let T21 = βg,A +γg,A +βg,B +γg,B +βw,A +γw,A .
αw,A +γw,A p 2 αw,B +γw,B p 2 αw,A +γw,A p1 αg,B +γg,B p1
If −min(cw,A − β +γ w,A , eA ) < T02 < min(cw,B − β +γ w,B , eB ) and cw,A − β +γ w,A ≤ eA ≤ min( β +γ g,B −
w,A w,A w,B w,B w,A w,A g,B g,B
cg,B , T21 ), then
⎛ ⎞
αg,A +γg,A p2g,A αg,B +γg,B p2g,B
βg,A +γg,A + cg,A + T0
2
βg,B +γg,B + cg,B − T0
2
αw,A + γw,A p2w,A αw,B + γw,B p2w,B
(g1 , g2 , g3 , g4 ) = ⎝ , , , ⎠
2 2 βw,A + γw,A βw,B + γw,B
⎛ ⎞
αg,A +γg,A p1g,A αg,B +γg,B p1g,B αw,A +γw,A p1w,A
βg,A +γg,A + cg,A − eA βg,B +γg,B + cg,B + eA βw,A +γw,A + cw,A − eA αw,B + γw,B p1w,B
(g5 , g6 , g7 , g8 ) = ⎝ , , , ⎠
2 2 2 βw,B + γw,B
γg,A γg,A +γg,B γ γ +γ γ γ γ
Therefore, H ∞ = max(2(β + 2 (β , 2(β g,B + 2(β +γg,A +βg,B +γ ) , β w,A , w,B
, g,A
,
g,A +γg,A ) g,A +γg,A +βg,B +γg,B ) g,B +γg,B ) g,A g,A g,B g,B w,A +γw,A βw,B +γw,B 2 (βg,A +γg,A )
γg,B γ γw,B
2(βg,B +γg,B )
, 2(β w,A , ) < 1.
w,A +γw,A ) βw,B +γw,B
H∞ < 1 in other segments can be verified in a similar way. Hence the uniqueness of NE can be guaranteed.

Proof of Proposition 5. According to the best response function calculated in the proof of Theorem 1, if
αw,A +γw,A p2w,A αw,B +γw,B p2w,B
(1) −min(cw,A − βw,A +γw,A , eA ) < T0 < min(cw,B − βw,B +γw,B , eB )
2

2 2
βg,A +γg,A +cg,A +T0 βg,B +γg,B +cg,B −T0 αw,A +γw,A p2 αw,B +γw,B p2w,B
p1g,A= 2
1
, pg,B = 2 , p1w,A = β +γ w,A , p1w,B = βw,B +γw,B .
w,A w,A
Since p1∗
i, j
= p2∗i, j
∀i, j, by solving the equations, we have
αg,A D
αg,B
βg,A +γg,A +cg,A +T0 +cg,B −T0D
k∗ = βg,B +γg,B α α
pk∗
g,A
= 2−ρg,A , p g,B 2−ρg,B , pk∗
w,A
= βw,A , pk∗w,B
= βw,B .
w,A w,B
γ α −β c α −β c β βg,B
where ρi, j = β +i, γj , T0D = ( g,A2−ρg,A g,A − g,B2−ρg,B g,B )/( 2−g,A ρg,A + 2−ρg,B ).
i, j i, j g,A g,B
α α
To satisfy the constraint, we have −min(cw,A − βw,A , eA ) < T0D < min(cw,B − βw,B , eB ).
w,A w,B
αw,B +γw,B p2w,B
(2) eB ≤ T02 , eB < cw,B − βw,B +γw,B
β +γg,A
+cg,A +eB βg,B +γg,B +cg,B −eB αw,A +γw,A p2 αw,B +γw,B p2w,B
p1g,A = g,A
2 , p1g,B = 2 , p1w,A = β +γ w,A , p1w,B = βw,B +γw,B .
w,A w,A
Since p1∗
i, j
= p2∗i, j
αg,A αg,B
βg,A +γg,A +cg,A +eB k∗ = βg,B +γg,B
+cg,B −eB
α α
pk∗
g,A
= 2−ρg,A , pg,B 2−ρg,B , pk∗
w,A
= βw,A , pk∗w,B
= βw,B .
w,A w,B
α
To satisfy the constraint, we have eB ≤ T0D , eB < cw,B − βw,B .
w,B
αw,A +γw,A p2w,A
(3) eA ≤ −T02 , eA < cw,A − βw,A +γw,A
βg,A +γg,A +cg,A −eA βg,B +γg,B +cg,B +eA αw,A +γw,A p2 αw,B +γw,B p2w,B
p1g,A= 2
1
, pg,B = 2 , p1w,A = β +γ w,A , p1w,B = βw,B +γw,B .
w,A w,A
Since p1∗
i, j
= p2∗
i, j
αg,A αg,B
βg,A +γg,A +cg,A −eA k∗ = βg,B +γg,B
+cg,B +eA
α α
pk∗
g,A
= 2−ρg,A , pg,B 2−ρg,B , pk∗
w,A
= βw,A , pk∗
w,B
= βw,B .
w,A w,B
α
To satisfy the constraint, we have eA ≤ −T0D , eA < cw,A − βw,A .
w,A
αw,B +γw,B p2w,B αg,A +γg,A p2g,A
(4) T12 < eB , cw,B − 2
βw,B +γw,B ≤ T1 ≤ βg,A +γg,A − cg,A
αg,A +γg,A p2g,A αg,B +γg,B p2g,B αw,B +γw,B p2w,B
2 2 2
βg,A +γg,A +cg,A +T1 βg,B +γg,B +cg,B −T1 αw,A +γw,A p2w,A 1 βw,B +γw,B +cw,B −T1
p1g,A= 2 , p1
g,B
= 2 , p1
w,A
= βw,A +γw,A , pw,B
= 2 .
Since p1∗ = p2∗ ∀i, j, by solving the equations, we have
i, j i, j
αg,A αg,B αw,B
+cg,A +T1D βg,B +γg,B +cg,B −T1
D D
k∗ β + γ
g,A g,A k∗ k∗ αw,A k∗ βw,B +γw,B +cw,B −T1
pg,A = 2−ρg,A , pg,B = 2−ρg,B , pw,A = β , pw,B = 2− ρ .
w,A w,B
αg,A −βg,A cg,A αg,B −βg,B cg,B αw,B −βw,B cw,B βg,A βg,B βw,B
where T1 = ( 2−ρ
D − 2−ρg,B − 2−ρw,B )/( 2−ρ + 2−ρ + 2−ρ ).
g,A g,A g,B w,B
α α
To satisfy the constraint, we have T1D ≤ βg,A − cg,A , cw,B − βw,B ≤ T1D < eB .
g,A w,B
αw,A +γw,A p2w,A αg,B +γg,B p2g,B
(5) T22 < eA , cw,A − 2
βw,A +γw,A ≤ T2 ≤ βg,B +γg,B − cg,B
2 2 2
βg,A +γg,A +cg,A −T2 βg,B +γg,B +cg,B +T2 βw,A +γw,A +cw,A −T2 αw,B +γw,B p2w,B
p1g,A= 2
1
, pg,B = 2
1
, pw,A = 2 , p1w,B = βw,B +γw,B .
Since p1∗
i, j
= p2∗i, j
αg,A D
αg,B αw,A
+c g,A −T2 +cg,B +T2D +cw,A −T2D
βg,A +γg,A k∗ = βg,B +γg,B k∗ = βw,A +γw,A α
pk∗
g,A
= 2−ρg,A , p g,B 2−ρg,B , pw,A 2−ρw,A , pk∗
w,B
= βw,B .
w,B
α −β c α −β c α −β c β βg,B βw,A
where T2D = ( g,B2−ρg,B g,B − g,A2−ρg,A g,A − w,A2−ρw,A w,A )/( 2−g,A ρg,A + 2−ρg,B + 2−ρw,A . )
g,B g,A w,A
α α
To satisfy the constraint, we have T2D ≤ βg,B − cg,B , cw,A − βw,A ≤ T2D < eA .
g,B w,A
αw,B +γw,B p2w,B αg,A +γg,A p2g,A
βw,B +γw,B ≤ eB ≤ min( βg,A +γg,A − cg,A , T1 )
(6) cw,B − 2
αg,A +γg,A p2g,A αg,B +γg,B p2g,B αw,B +γw,B p2w,B

+cg,A +eB βg,B +γg,B +cg,B −eB
β + γ αw,A +γw,A p2w,A 1 βw,B +γw,B +cw,B −eB
p1g,A = g,A g,A
2 , p1 =
g,B 2 , p1
w,A
= βw,A +γw,A , pw,B = 2 .
Since pi, j = pi, j ∀i, j, by solving the equations, we have
1∗ 2∗
αg,A αg,B αw,B
βg,A +γg,A +cg,A +eB k∗ = βg,B +γg,B
+cg,B −eB
k∗ = αw,A , pk∗ = βw,B +γw,B
+cw,B −eB
pk∗
g,A
= 2−ρg,A , pg,B 2−ρg,B , pw,A βw,A w,B 2−ρw,B .
α α
To satisfy the constraint, we have cw,B − βw,B ≤ eB ≤ min( βg,A − cg,A , T1D ).
w,B g,A
αw,A +γw,A p2w,A αg,B +γg,B p2g,B
βw,A +γw,A ≤ eA ≤ min( βg,B +γg,B − cg,B , T2 )
(7) cw,A − 2

βg,A +γg,A +cg,A −eA βg,B +γg,B +cg,B +eA βw,A +γw,A +cw,A −eA αw,B +γw,B p2w,B
p1g,A= 2
1
, pg,B = 2
1
, pw,A = 2 , p1w,B = βw,B +γw,B .
Since pi, j = pi, j ∀i, j, by solving the equations, we have
1∗ 2∗
αg,A αg,B αw,A
βg,A +γg,A +cg,A −eA k∗ = βg,B +γg,B
+cg,B +eA
k∗ = βw,A +γw,A
+cw,A −eA
α
pk∗
g,A
= 2−ρg,A , pg,B 2−ρg,B , pw,A 2−ρw,A , pk∗
w,B
= βw,B .
w,B
α α
To satisfy the constraint, we have cw,A − βw,A ≤ eA ≤ min( βg,B − cg,B , T2D ).
w,A g,B
Then we can calculate the corresponding demand and profit by di,k∗j = αi, j − βi pk∗ i, j
+ γi, j ( p(i,3−k
j
)∗
− pk∗
i, j
) and k∗ =
k∗
i ( pi, j − ci, j )di, j − eA (dg,B + dw,B − dg,A − dw,A ) − eB (dg,A + dw,A − dg,B − dw,B ) , which are summarized in Table 4.
k∗ k∗ k∗ k∗ k∗ + k∗ k∗ k∗ k∗ +
j
Proof of Proposition 6. This proposition follows from the results in Table 4.
β +γ ∂f γ
Proof of Proposition 7. Let fi, j = (2−ρ )21(β +γ ) = (2βi, j +γi, j )2 , then ∂γi, j = − (2β +i, γj )3 < 0. Therefore, ∂∂γ < 0 (Case 2,
k∗
i, j i, j i, j i, j i, j i, j i, j i, j g,A
Case 3, Case 6 and Case 7), ∂∂γ < 0 (Case 2, Case 3, Case 6 and Case 7), ∂γ
∂ < 0 (Case 7) and ∂ < 0 (Case 6) can be
k∗ k∗ k∗
g,B w,A ∂γw,B

easily checked. Besides,
∂ k∗ k∗2
dg,A ρg,A 2−βg,B ρg,B
ρg,B + βg,A 2−ρg,B
=− < 0 (Case 1 )
∂γg,A (2βg,A + γg,A )(βg,A + γg,A ) βg,A β
+ g,B 2−ρg,A 2−ρg,B
∂ k∗ k∗2
dg,B ρg,B 2−βg,A ρg,A
ρg,A + βg,B 2−ρg,A
=− <0 (Case 1 )
∂γg,B (2βg,B + γg,B )(βg,B + γg,B ) βg,A β
+ 2−g,B
2−ρg,A ρg,B
∂ k∗ k∗
dg,A k∗
dg,A ρg,A ( 2−βg,B
ρg,B +
βw,B
2−ρw,B
k∗ ρg,B
) + βg,A (dg,B 2−ρg,B
+ dw,B
k∗ ρw,B
2−ρw,B
)
=− <0 (Case 4 )
∂γg,A (2βg,A + γg,A )(βg,A + γg,A ) βg,A
+
βg,B
+
βw,B
∂ k∗ k∗
dg,B k∗
dg,B ρg,B ( 2−βg,A
ρg,A +
βw,B
2−ρw,B
k∗ ρg,A
) + βg,B (dg,A 2−ρg,A
− dw,B
k∗ ρw,B
2−ρw,B
)
=− (Case 4 )
∂γg,B (2βg,B + γg,B )(βg,B + γg,B ) βg,A
+
βg,B
+
βw,B
∂ k∗ k∗
dw,B
k∗
dw,B ρw,B ( 2−βg,A βg,B k∗ ρg,A k∗ ρg,B
ρg,A + 2−ρg,B ) + βw,B (dg,A 2−ρg,A − dg,B 2−ρg,B )
=− (Case 4 )
∂γw,B (2βw,B + γw,B )(βw,B + γw,B ) βg,A β
+ g,B + w,B
β

βg,B β ρ ρ
∂ k∗ k∗
dg,A
k∗
dg,A ρg,A 2−ρg,B
+ 2−w,A
ρw,A + βg,A (dg,B
k∗ g,B
2−ρg,B
− dw,A
k∗ w,A
2−ρw,A
)
=− (Case 5 )
∂γg,A (2βg,A + γg,A )(βg,A + γg,A ) βg,A
+
βg,B
+
βw,A

βg,A β ρ ρ
∂ k∗ k∗
dg,B
k∗
dg,B ρg,B 2−ρg,A
+ 2−w,A
ρw,A + βg,B (dg,A
k∗ g,A
2−ρg,A
+ dw,A
k∗ w,A
2−ρw,A
)
=− <0 (Case 5 )
∂γg,B (2βg,B + γg,B )(βg,B + γg,B ) βg,A
+
βg,B
+
βw,A

βg,B β ρ ρ
∂ k∗ k∗
dw,A
k∗
dw,A ρw,A 2−ρg,B
+ 2−g,A
ρg,A + βw,A (dg,B
k∗ g,B
2−ρg,B
− dg,A
k∗ g,A
2−ρg,A
)
=− (Case 5 )
∂γw,A (2βw,A + γw,A )(βw,A + γw,A ) βg,A
+
βg,B
+
βw,A
Proof of Proposition 8.
(1) In Case 3:
∂ k∗ 2(zg,A + βg,A eA ) 2(zg,B − βg,B eA )

= βg,A + (−βg,B )
∂ eA (2 − ρg,A ) (βg,A + γg,A )
2 (2 − ρg,B )2 (βg,B + γg,B )

2zg,A 2zg,B 2βg,A 2βg,B

= − + + e
(2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) (2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) A
(2) In Case 2:
∂ k∗ 2(zg,A − βg,A eB ) 2(zg,B + βg,B eB )

= (−βg,A ) + β
∂ eB (2 − ρg,A )2 (βg,A + γg,A ) (2 − ρg,B )2 (βg,B + γg,B ) g,B

2zg,A 2zg,B 2βg,A 2βg,B

=− + + + e
(2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) (2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) B
(3) In Case 7:
∂ k∗ 2(zg,A + βg,A eA ) 2(zg,B − βg,B eA ) 2(zw,A + βw,A eA )

= β + (−βg,B ) + β
∂ eA (2 − ρg,A )2 (βg,A + γg,A ) g,A (2 − ρg,B )2 (βg,B + γg,B ) (2 − ρw,A )2 (βw,A + γw,A ) w,A
2zg,A 2zg,B 2zw,A
= − +
(2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) (2 − ρw,A )2 /(1 − ρw,A )

2βg,A 2βg,B 2βw,A

+ + + e
(2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) (2 − ρw,A )2 /(1 − ρw,A ) A
(4) In Case 6:
∂ k∗ 2(zg,A − βg,A eB ) 2(zg,B + βg,B eB ) 2(zw,B + βw,B eB )

= (−βg,A ) + β + β
∂ eB (2 − ρg,A )2 (βg,A + γg,A ) (2 − ρg,B )2 (βg,B + γg,B ) g,B (2 − ρw,B )2 (βw,B + γw,B ) w,B
2zg,A 2zg,B 2zw,B
=− + +
(2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) (2 − ρw,B )2 /(1 − ρw,B )

2βg,A 2βg,B 2βw,B

+ + + e
(2 − ρg,A )2 /(1 − ρg,A ) (2 − ρg,B )2 /(1 − ρg,B ) (2 − ρw,B )2 /(1 − ρw,B ) B
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Transportation Research Part B 85 (2016) 32–55

Contents lists available at ScienceDirect

Transportation Research Part B

Pricing and competition in a shipping market with waste

Year Asia–Europe Transpaciﬁc Transatlantic

Asia–Eur Eur–Asia Asia–NA NA–Asia Eur–NA NA–Eur

2009 11.5 5.5 10.6 6.1 2.8 2.5

Source: UNCTAD (2014)

i = g, w g represents goods shipment and w represents waste shipment

di,k j = αi,k j − βi,k j pki, j + γi,kj ( p3−k

di,k j , pki, j ≥ 0 ∀i, j (3)

• ekA < min(cg,A

4. Pricing strategies in a monopoly market

Proposition 1. In the case of monopoly, the optimal pricing is as follows

Condition ( p∗g,A , p∗g,B , p∗w,A , p∗w,B ) ∗

α zg,A −βg,A T0 zg,B +βg,B T0

( p∗g,A , p∗g,B , p∗w,A , p∗w,B )

⎨ αg,A αg,B αw,B

βg,A +cg,A +T1 βg,B +cg,B −T1 α βw,B +cw,B −T1 α α

Proposition 2. In the case of monopoly,

Proposition 3. In the case of monopoly,

Proposition 4. In the case of monopoly,

The corresponding proﬁt is

5. Pricing strategies in a duopoly market

Theorem 1. There exists a unique symmetric pure strategy NE in this game.

βg,A +γg,A +cg,A +T1 βg,B +γg,B +cg,B −T1

zg,A z zg,A z z zg,B z z

βg,A +γg,A +cg,A +T0 βg,B +γg,B +cg,B −T0

βg,A +γg,A +cg,A +T1 βg,B +γg,B +cg,B −T1

αg,A αg,B αw,A

βg,A +γg,A +cg,A −T2 βg,B +γg,B +cg,B +T2

αg,A αg,B αw,B

Proposition 6. In the case of duopoly with symmetric carriers,

Proposition 7. In the case of duopoly with symmetric carriers,

Fig. 3. Proﬁt against competition intensity γ g, B and γ w, B in Case 4.

Fig. 4. Proﬁt against ECR cost eA .

The inﬂuence of ECR cost on each carrier’s proﬁt is summarized in Proposition 8.

Proposition 8. In the case of duopoly with symmetric carriers,

k )+ , and the NE solution is

The corresponding proﬁt is

(a) case 4 and TD0 < eB (b) case 4 and TD0 ≥ eB

ρg,A ρg,B ρg,A

αg,B /(βg,B +γg,B )+cg,B −T1D

6.1. N symmetric carriers

6.2. Asymmetric carriers

Proof of Proposition 1. Deﬁne two new problems:

di, j = αi, j − βi, j pi, j ∀i, j

βg,A βg,B +cg,B −T1 α βw,B +cw,B −T1 α α

Proof of Proposition 2. This proposition follows from the results in Table 2.

Proof of Theorem 1. The result is proven in three steps:

⎪ αg,A +γg,A p2g,A

⎪ αg,A +γg,A p2g,A

αg,A +γg,A p2g,A αg,B +γg,B p2g,B

αg,A +γg,A p2g,A αg,B +γg,B p2g,B αw,B +γw,B p2w,B

αg,A +γg,A p2g,A αg,B +γg,B p2g,B αw,A +γw,A p2w,A

Proof of Proposition 6. This proposition follows from the results in Table 4.

g,B w,A ∂γw,B

Proposition 7 follows from these results.

∂ k∗ 2(zg,A + βg,A eA ) 2(zg,B − βg,B eA )

2zg,A 2zg,B 2βg,A 2βg,B

∂ k∗ 2(zg,A − βg,A eB ) 2(zg,B + βg,B eB )

2zg,A 2zg,B 2βg,A 2βg,B

∂ k∗ 2(zg,A + βg,A eA ) 2(zg,B − βg,B eA ) 2(zw,A + βw,A eA )

Condition ( p∗g,A , p∗g,B , p∗w,A , p∗w,B ) ∗

∂ k∗ 2(zg,A + βg,A eA ) 2(zg,B − βg,B eA )

∂ k∗ 2(zg,A − βg,A eB ) 2(zg,B + βg,B eB )

∂ k∗ 2(zg,A + βg,A eA ) 2(zg,B − βg,B eA ) 2(zw,A + βw,A eA )

∂ k∗ 2(zg,A − βg,A eB ) 2(zg,B + βg,B eB ) 2(zw,B + βw,B eB )