Pricing and Delivery-Time Performance in a Competitive Environment

We present a model of market competition in which customer preferences are over not only price and quality but also delivery speed. This allows a study of market demand and firms' decisions on price, quality, technology and responsiveness in a competitive environment. When demand arises, a cust...

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Bibliographic Details
Published in:Management science 1994-05, Vol.40 (5), p.633-646
Main Authors: Li, Lode, Lee, Yew Sing
Format: Article
Language:English
Subjects:
Capital costs
Competition
Consumer behavior
Customer satisfaction
Decreasing functions
Deliveries
Delivery costs
delivery-time competition
Economic competition
Expected utility
Management science
Market competition
Market prices
Market share
Nash equilibrium
New products
Observational research
Price premiums
Pricing
Queuing
Studies
Temporal dimension
time-sensitive customers
two-server queues
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Summary:We present a model of market competition in which customer preferences are over not only price and quality but also delivery speed. This allows a study of market demand and firms' decisions on price, quality, technology and responsiveness in a competitive environment. When demand arises, a customer chooses the firm that maximizes its expected utility of price, quality and response time. The demand function for each firm is derived by analyzing a queueing system with competing servers. We then study price competition among firms with differentiated processing rates. In the equilibrium, the firm with a higher processing rate always enjoys a price premium, and, further, enjoys a larger market share when its opponent also has adequate processing rate to serve all the customers alone.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.40.5.633