Transportation Pricing and Market Structures

Understanding Transportation Rates and Prices

A rate is an amount that can be found in a rate tariff book, serving as payment to a carrier for performing a given transportation service. The rate is a lawful charge that a carrier can impose on a given commodity movement.

A price implies a value that is determined based on prevailing market forces; it suggests a dynamic environment that is receptive to changes in customer demand and carrier supply.

Four Primary Market Structures in Logistics

• Pure Competition (Many Companies): Many sellers with the same product or service. No single entity influences price, and there is unrestricted entry. A producer can sell all at one market price, but none above that.
• Oligopolistic (Small Number of Large Companies): Few large sellers with substitutable products. Competitors compete on price (e.g., Less-than-Truckload or LTL).
• Monopolistic (Large Number of Small Companies): Many small sellers with some product differentiation. No one controls a significant portion of the market (e.g., Truckload or TL).
• Pure Monopoly (One Company): One seller with no close product substitutes or competitors. This often results in too little output and excessively high profits.

Relevant and Contestable Market Factors

Relevant Markets

• Mode-specific
• Route-specific
• Commodity-specific
• Shipment size-specific

Contestable Markets

• No barriers to entry
• No sunk costs and no economies of scale
• Consumers able and willing to switch
• Carriers are not able to respond to new entrants’ prices

Differential Pricing and Price Discrimination

Third-degree price discrimination requires three specific conditions:

1. The seller must be able to separate buyers into groups.
2. The seller must be able to prevent the transfer of sales between submarkets (buying at a low price and selling at a higher price).
3. The seller must possess some degree of monopoly power (i.e., the ability to set prices).

Buyers are segmented by commodity, time, place, company, and legal limitations.

Class, Exception, and Commodity Rate Systems

Class Rates

Class rates provide a rate for any commodity between any two geographic locations through a simplification procedure:

• Geographic: Locations in proximity are grouped and represented by a rate basis point. Each pair of points is assigned a rate basis number.
• Commodity: Products with similar transport characteristics are assigned a commodity classification number and class rating.

Exception Rates

Exception rates are a deviation from the class rate where changes (exceptions) are made to the national classification. These are published when the characteristics of an item in a specified geographic area differ from those of the same article in other areas. They are used for particular transport conditions; for example, high volume or intense competition in an area may require a lower price.

Commodity Rates

Commodity rates can be constructed on a variety of bases. The most common is a specific rate on a commodity between specified points via a specific route and direction. This rate takes priority over class and exception rates. A disadvantage is that it reverts to the publication of a multiplicity of rates and adds to the complexity of the pricing system.