Researchers have long recognized that trucking spot market prices affect contract prices. The typical one-year contract between a shipper and carrier is based on spot prices. Though one-time spot market transactions account for a relatively small portion of truckload freight, spot prices influence the contract prices that cover 80-95% of truckload freight. When spot market prices are high, contract prices are also generally higher. Before December 2017, spot prices were affected by carriers’ propensity to artificially adjust capacity up or down as the market fluctuated. When spot prices were high, they drove more to “make hay while the sun shines.” When spot prices fell, they drove less. A recent study by Jason W. Miller (Michigan State University), Alex Scott (Michigan State University) and Brent D. Williams (University of Arkansas) suggests that the December 2017 federal electronic logging device (ELD) mandate curtailed firms’ ability to artificially adjust capacity. The hours-of-service monitoring devices are more unflinchingly accurate than the paper logbooks many carriers previously used. The mandate thereby limits both firms’ ability to drive more when spot prices are high and their desire to drive less when prices are low. Therefore, spot market prices should be a more accurate barometer of supply and demand now that carriers are less likely to artificially adjust capacity. Has that shift led shippers and carriers to rely even more heavily on spot prices when negotiating contracts? That’s the question the authors examine in “Pricing Dynamics in the Truckload Sector: The Moderating Effect of the Electronic Logging Device Mandate.”
Drawing from economic theories on how firms process information, the authors hypothesize that the ELD mandate should have made shippers and carriers more likely to base contract prices on spot market prices. Miller, Scott, and Williams test their theory using monthly spot price data from DAT Solutions and monthly contract pricing data from the Bureau of Labor Statistics covering January 2013 through November 2019. They find that contract prices became more sensitive to changes in spot prices after the ELD mandate went into effect. They largely attribute this to carriers’ decreased ability to artificially adjust capacity after the mandate. Additionally, the authors find that the relationship between the two factors is unidirectional. While prior changes in spot prices affect current contract prices, prior changes in contract prices do not affect current spot prices.
This study has implications for carriers, shippers, and researchers. It shows both carriers and shippers that contract prices are more heavily influenced by spot market prices than ever before. This means that carrier managers should closely monitor spot prices – even if their firm hauls relatively few spot shipments – since their carrier’s financial health is closely tied to the spot market. The authors suggest that shippers can use their findings to inform the budgeting process and make more strategic decisions. For example, their results suggest that if aggregate spot prices increase by 20%, then aggregate contract prices should be expected to increase by approximately 4% over the next 4-6 months, other things equal. Shippers might use this knowledge to help decide to increase the use of domestic intermodal for long-distance shipments, since domestic intermodal becomes more attractive when truckload prices rise. Conversely, awareness of declining spot prices might help shippers reduce their spending in upcoming procurement auctions and contract negotiations. The authors also offer related questions for other researchers to consider. For instance, since relatively little is known about carriers’ bidding behaviour, researchers may examine the extent to which firms incorporate broader macroeconomic conditions into their contract bids.
Read the full article in the Journal of Business Logistics.