Default Correlation and Its Effects in Logistics Service Supply Chain

Abstract

In order to supply integrated logistics service, Logistics Service Integrators (LSIs), as core entities in Logistics Service Supply Chains (LSSCs), often have to outsource several parts of the integrated service or functions to Functional Logistics Service Providers(FLSPs). And the outsourcing activities cause default correlation between LSIs and FLSPs. This paper establishes a capacity distribution model and a game model between two FLSPs so as to solve the problems of LSI’s order quantity optimization and FLSP’s profit optimization. Then we model the effects on LSSC caused by default correlation based on three special cases, and the results show the equilibrium order quantity and the profit of LSI and LSSC increase while the equilibrium price and profit of FLSP decrease, if survival probability P00 of two FLSPs increase.