Optimal freight pricing considering routing and the ordering behavior of receivers

Abstract

Urban deliveries are crucial for the development of cities; however, they produce negative externalities, such as emissions and congestion. At first glance, it may appear carriers are generating these externalities, but in reality, the ordering decisions of the receivers of supplies, i.e., commercial establishments, play a significant role in creating freight externalities. Receivers create the need for freight trips. Therefore, policies that foster changes in the receivers' ordering decisions, such as reducing the number of orders, are necessary to reduce externalities produced by freight activity for the benefit of society.These policies should not only consider the welfare of society but also balance the profit-maximizing nature of businesses. For example, businesses are often limited by the available floorspace and must decide how to allocate this space between productive activities and storage. The allocation of floorspace affects their ordering decisions and, ultimately, their profits. This research contributes to promoting sustainable urban deliveries by developing policy procedures that induce changes in receivers' behavior. To this effect, this research is the first to develop an analytical formulation for the Social Optimal Routing and Ordering Problem (SOROP) that considers: (i) the profit-maximizing behavior of receivers, (ii) an externality charge to account for the externalities produced by their ordering decisions, and (iii) the effect of these decisions in the routing structure. The model clusters receivers based on their ordering patterns, grouping those who order with similar frequency into the same delivery tour. The results of a numerical experiment reveal that imposing an externality charge on receivers reduces the number of orders placed, increases order sizes, and reduces negative externalities generated by urban deliveries. Furthermore, the study includes an elasticity analysis to identify the effect of cost components and establishment attributes on the receivers' ordering behavior. This research demonstrates that receiver pricing plays a crucial role in urban freight management as it forces the receivers to internalize the externalities produced, ultimately reducing the number of freight trips.