A carrier–shipper contract under asymmetric information in the ocean transport industry

We study the carrier–shipper contracting issue in a single time period (i.e., 1 year) consisting of a low demand season followed by a high demand season under asymmetric information arising from the ocean freight industry. In order to address the contract default problem that is prominent in this industry, we propose a proportion requirement policy in which the capacity allocated to the shipper at the contract price in the high demand season is proportional to his quantity commitment in the low demand season. The shipper has private information about the low season demand while the carrier does not. To induce truthful information revelation, the carrier offers a bundle consisting of two two-part tariff contracts, each of which targets for one market state. In our model, the carrier determines the contract bundle to maximize her expected profit in both seasons. The shipper decides which contract to sign after observing the market state, and then determines the optimal shipping quantity to minimize his total expected cost. We characterize the carriers optimal contract bundle under asymmetric information and the shippers optimal strategy for each market state. The analytical results show that both the carrier and the shipper can be better off with an appropriately designed contract bundle compared with replying solely on the spot market under certain conditions. We also investigate how the outcomes of the system (e.g., the shippers optimal commitment quantity, the optimal contract price, the information rent and the carriers expected profit) are affected by the proportion requirement parameter, the degree of information asymmetry, and the uncertainty of the market state type.