When Friends Become Competitors: The Design of Resource Exchange Alliances

51 Pages Posted: 13 Sep 2013 Last revised: 13 Nov 2015

See all articles by So Yeon Chun

So Yeon Chun

Georgetown University - Robert Emmett McDonough School of Business

Anton Kleywegt

Georgia Institute of Technology - School of Industrial and Systems Engineering

Alexander Shapiro

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

Date Written: September 11, 2013

Abstract

Many carriers, such as airlines and ocean carriers, collaborate through the formation of alliances. The rules of alliances are important for both the stability of the alliance and the profitability of the alliance members. In this paper, we address the design of resource exchange alliances, a type of alliance agreements widely used in practice, especially in the ocean cargo industry. Resource exchange alliances often increase competition among alliance members since the members can sell substitutable products after the exchange. We propose a resource exchange model that takes into account the resulting competition and alliance profit allocation among alliance members. The problem of determining the optimal amounts of resources to exchange is formulated as a stochastic mathematical program with equilibrium constraints (MPECs). Although MPEC problems are, in general, very difficult to solve, we successfully demonstrate the efficient solution approach and provide valuable insights for the resource exchange design problem. In particular, we show that a resource exchange alliance we propose can induce greater profit for the alliance members (both total and individual profits) even though it leads to greater competition.

Keywords: alliance, resource exchange, pricing, revenue management, stochastic mathematical programming with equilibrium constraints, non-cooperative game

JEL Classification: A10, C61, C62, C72

Suggested Citation

Chun, So Yeon and Kleywegt, Anton and Shapiro, Alexander, When Friends Become Competitors: The Design of Resource Exchange Alliances (September 11, 2013). Georgetown McDonough School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2324461 or http://dx.doi.org/10.2139/ssrn.2324461

So Yeon Chun (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Anton Kleywegt

Georgia Institute of Technology - School of Industrial and Systems Engineering ( email )

Atlanta, GA 30332
United States

Alexander Shapiro

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )

765 Ferst Drive
Atlanta, GA 30332-0205
United States

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