Vertical contract selection under chain-to-chain service competition in shipping supply chain

Abstract In shipping industry, horizontal competition between carriers is no longer confined to price competition, but more performed as service competition between chain-to-chain. Confronting the fierce market competition, the contractual vertical alliance has gradually become the trend of shipping integration. Our paper studies the effects and vertical selection of contract in two parallel competitive shipping supply chains. We derive the equilibrium and optimal strategies through the contract selection matrix and find the chain's revenue-sharing contract brings service quality and demand volume advantage to itself but disadvantage to its competitor. However, when two competing chains choose different contracts, there will be a win-win situation where Pareto-optimization occurs in the chain which adopts the revenue-sharing contract and whose overall profit is maximized as well. Interestingly, we identify a lose-lose situation, that is, a classic Prisoner's Dilemma occurs when both chains adopt revenue-sharing contract. In the end, we provide insights for the carrier companies, port authority and government planning to adopt integrated strategies.