Price and leadtime di erentiation and operations strategy in a competitive market

Sachin Jayaswal

No WP2013-11-05, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: We study a duopoly market in which customers are heterogeneous in their sensitivity to price and leadtime, and can be segmented as price sensitive or time sensitive. Each fi rm tailors (di fferentiates) its products/services for the two customer classes solely based on price and the corresponding guaranteed leadtime. Our objective is to understand how competition a ffects price and leadtime diff erentiation of the fi rms since the extant literature reports very contradicting results. Our results suggest that when fi rms use dedicated resources to serve the two market segments, pure price competition always tends to decrease individual prices as well as price di fferentiation, irrespective of the market behavior. Further, the effect of competition is more pronounced when customers are allowed to self-select, thereby introducing substitutability between the two product options. On the other hand, when fi rms compete in time, in addition to price, the eff ect of competition on product diff erentiation depends crucially on the behavior of the market. We further use our model to study the eff ects of asymmetry between the competing firms on their product diff erentiation. Our results suggest that the firm with a larger market base should always maintain a larger price and leadtime di fferentiation between the two market segments. Similarly, the fi rm with a capacity cost advantage should also maintain a larger leadtime di fferentiation.

Date: 2013-11-07
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