Cost-Sharing Mechanism Design for Freight Consolidation among Small Suppliers

A fair cost allocation scheme is critical for forming and sustaining horizontal cooperation that leads to cost reductions. In order to incentivize suppliers to cooperate in freight consolidation, we design a cost-sharing mechanism to solve a cost allocation problem arising in freight consolidation among small suppliers: that is, suppliers whose total demand fits into one truckload. This cost-sharing mechanism determines the set of suppliers who will participate in the consolidation and their corresponding cost shares. We design this cost-sharing mechanism to ensure that every supplier is willing to reveal their preference truthfully and the total consolidation cost incurred is recovered by the allocated costs. Moreover, our analytical and numerical study shows that our cost-sharing mechanism often yields cost shares that maximize the social welfare of all the suppliers.