A Cooperative Mechanism Between China Post And Private Express Firm For Remote Area Express Market

In China, although the express industry has been developed greatly in main cities because of the fast developing B2C e-commerce during the past decade, the express market from cities to remote areas such as pastoral areas, islands, mountains, boarder and so on, is still underdeveloped. Due to the low population density of these remote areas, an express delivery to these areas implies a long distance and a high delivery cost, which prevent most private express firms from entering this market. As a result, this market is currently monopolized by China Post.In this paper, we propose a cooperation mechanism between China Post and private express firms, under which private firms outsource "the last miles" to China Post. With this mechanism, both the China Post’s advantage in its universal postal service network and the efficiency of private firms in their intercity express could be fully utilized. To investigate whether this cooperative mechanism works, we develop a pricing model for the mentioned express market in three scenarios:(i) China Post monopolizes the remote area market;(ii) China Post competes with a private express company without providing "the last mile" outsourcing service; and (iii) China Post cooperatively provides the "last mile" service to the private express firm. We derive the optimal decisions of the system members in the three different scenarios. Comparison between them shows that the proposed cooperative mechanism provides Pareto improvement for both China Post and the private express firm. Furthermore, we analyze the optimal decisions in an integrated scenario and introduce a revenue sharing contract to coordinate the two members.Different from previous literatures, our research contributes the literatures in the following ways. First, we provide a cooperation mechanism bringing a Pareto improvement for all participants rather than be focused on the establishment of a "universal service fund". Second, we investigate in the perspective of quality improvement of express service from cities to remote areas that were not sufficiently considered in previous literatures. Third, we introduce welfare function to investigate the government’s optimal decision based on social welfare maximization.