Promised delivery time and capacity games in time-based competition
Institute for Operations Research and the Management Sciences (INFORMS)
time-based competition, consumer choice model, Nash equilibrium, switching surface, quality differentiation, capacity competition, marketing–operations interface
We investigate firms' competitive behaviors in industries where customers are sensitive to both promised delivery time (PDT) and quality of service (QoS) measured by the on-time delivery rate. To study the competition in PDT at the marketing level, we construct an oligopoly game with an external QoS requirement. We show that there exists a unique Nash equilibrium, and the equilibrium QoS exhibits a switching surface structure with respect to capacities. To study the competition in capacity at the strategic level, we construct a two-stage game in which the firms compete in terms of their capacities in stage 1 and in terms of PDT in stage 2. We show the existence of two different types of pure strategy equilibria and characterize them. This study provides the following insights: an index of time-based competitive advantage (ITCA) and the first-mover advantage determine the positions of the firms in time-based competition; either the well-known prisoner's dilemma or off-equilibrium behaviors due to different preferences for equilibria (when multiple equilibria exist) may lead the firms to overinvest in capacity, but no one may gain a competitive advantage; a uniform improvement in internal efficiency (i. e., a uniform capacity cost reduction) may harm everyone; quality differentiation (i. e., going beyond the QoS benchmark) plays a dual role in time-based competition, either helping a firm with a larger ITCA to compete more effectively, or helping a firm possibly with a smaller ITCA to preempt competitors and protect its market advantage.
Copyright © 2011, INFORMS
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Shang, W., & Liu, L. (2011). Promised delivery time and capacity games in time-based competition. Management Science, 57(3), 599-610. doi: 10.1287/mnsc.1100.1292