Mid-West Trucking is a medium-sized TL carrier based in Des
Moines, Iowa. Like many other carriers based in Iowa and surrounding states,
Mid-West Trucking faces much demand for eastbound shipments (because in most
cases productions of goods take place in Midwest areas and consumptions take
place in large cities in East Coast regions). But since not much demand exists
for westbound shipments (from East Coast cites to midwestern areas), the
carrier had struggled with finding backhaul customers for many years. For this
reason, MidWest Trucking now provides a large price discount for the westbound
shipments to capture the customer demands that would otherwise not exist
(needless to say, generating a little money on backhaul is better than
generating no money on backhaul).
The actual cost of moving a truck from a Midwest city to an
East Coast city (and vice versa) is typically around $1,000. But because of the
uncertainty the company faces for finding backhaul customers at East Coast
cities, Mid-West Trucking typically charges $2,000 for an eastbound shipment.
The extra $1,000 (beyond the cost) reflects the cost of backhaul (which is less
than $1,000 in the long run, as the company can sometimes find backhaul
customers), as well as the profit for the company. On the other hand, Mid-West
Trucking charges roughly $700 for a westbound shipment. This means that, for
westbound shipments, the company does not even charge enough to cover the cost
(but once again, generating $700 is better than nothing, so the company is
willing to do this). By using this strategy, Mid-West Trucking has been making
a fair, but small, amount of profit over the past several years. The management
has been happy with what they have been doing so far.
One day, James Black, the marketing manager of Mid-West
Trucking, was meeting with David White, one of his clients who tenders many
eastbound shipments to Mid-West Trucking. During this meeting, David expressed
concerns about the large difference in pricing between eastbound and westbound
shipments. Specifically, David said the following to James:
“I am not happy with what you are doing for westbound
shipments. I know what you charge does not even cover the cost. This means that
you are making money from shippers like me, who tender eastbound shipments, and
losing money from westbound shipments. This is not fair, because it is like we
are subsidizing the cost of shipments for your westbound clients. I don’t want
to subsidize anyone whom I don’t even know. You will have to stop doing this
immediately. You must charge the same price for both eastbound and westbound
shipments. Otherwise it is not fair.”
James ponders how he should respond to this complaint made
by David. James wants to make sure that all of his clients are happy, but at
the same time, he also wants to make sure that Mid-West Trucking minimizes the
cost of backhauling by finding westbound customers via large price discounts.
1. Do you agree with David White? Why or why not?
2. If Mid-West Trucking follows the request by David White
and stops providing discounts on westbound freights (charge both eastbound and
westbound freights equally), what is the consequence for Mid-West Trucking and
for its clients?
3. Should Mid-West Trucking stop providing discounts to
westbound shipments immediately, as requested by David White?