Pricing and Product Mix Optimization in Freight Transportation

Abstract

This paper evaluates the hypothesis that an individual freight transportation company tends to implement pricing strategies that underrepresent the costs of empty equipment repositioning and that repositioning costs are treated as an externality to the freight transportation pricing decision. Freight carriers can improve profitability in their network of service offerings, or market mix, by incorporating these equipment repositioning costs into their price offerings. The hypothesis is tested in an applied setting in which Monte Carlo simulation captures the stochasticity of market conditions inherent in the problem. A simple heuristic is used to improve the nondifferentiable, discontinuous objective function. Results from test cases show a strong positive correlation of price change and externality when the repositioning cost is introduced to the pricing decision. Furthermore, there is a high confidence that the level of net profits is increased through this methodology.

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