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Product differentiation and operations strategy in a capacitated environment

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  • Jayaswal, Sachin
  • Jewkes, Elizabeth
  • Ray, Saibal
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    Abstract

    We study a firm selling two products/services, which are differentiated solely in their prices and delivery times, to two different customer segments in a capacitated environment. From a demand perspective, when both products are available to all customers, they act as substitutes, affecting each other's demand. Customized products for each segment, on the other hand, result in independent demand for each product. From a supply perspective, the firm may either share the same capacity or may dedicate a different capacity for each segment. Our objective is to understand the interaction between product substitution and the firm's operations strategy (dedicated versus shared capacity), and how this interaction shapes the optimal product differentiation strategy. We show that in a highly capacitated system, if the firm decides to move from a dedicated to a shared capacity setting, it will need to offer more differentiated products, whether the products are substitutable or not. In contrast, when independent products become substitutable, it results in a more homogeneous pricing scheme. Moreover, the optimal response to an increase in capacity cost also depends on the firm's operations strategy. In a dedicated capacity scenario, the optimal response is always to offer more homogeneous prices and delivery times. In a shared capacity setting, it is always optimal to quote more homogeneous delivery times, but to increase or decrease the price differentiation depending on whether the status-quo capacity cost is high or low, respectively.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 210 (2011)
    Issue (Month): 3 (May)
    Pages: 716-728

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    Handle: RePEc:eee:ejores:v:210:y:2011:i:3:p:716-728

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Pricing Product differentiation Delivery time guarantee Product substitution Capacity sharing;

    References

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    1. Sanjeev Dewan & Haim Mendelson, 1990. "User Delay Costs and Internal Pricing for a Service Facility," Management Science, INFORMS, INFORMS, vol. 36(12), pages 1502-1517, December.
    2. Andy A. Tsay & Narendra Agrawal, 2000. "Channel Dynamics Under Price and Service Competition," Manufacturing & Service Operations Management, INFORMS, INFORMS, vol. 2(4), pages 372-391, August.
    3. Shaler Stidham, 1992. "Pricing and Capacity Decisions for a Service Facility: Stability and Multiple Local Optima," Management Science, INFORMS, INFORMS, vol. 38(8), pages 1121-1139, August.
    4. Philipp Afèche & Haim Mendelson, 2004. "Pricing and Priority Auctions in Queueing Systems with a Generalized Delay Cost Structure," Management Science, INFORMS, INFORMS, vol. 50(7), pages 869-882, July.
    5. Ray, Saibal & Jewkes, E. M., 2004. "Customer lead time management when both demand and price are lead time sensitive," European Journal of Operational Research, Elsevier, Elsevier, vol. 153(3), pages 769-781, March.
    6. Tamer Boyaci & Saibal Ray, 2003. "Product Differentiation and Capacity Cost Interaction in Time and Price Sensitive Markets," Manufacturing & Service Operations Management, INFORMS, INFORMS, vol. 5(1), pages 18-36, May.
    7. So, Kut C. & Song, Jing-Sheng, 1998. "Price, delivery time guarantees and capacity selection," European Journal of Operational Research, Elsevier, Elsevier, vol. 111(1), pages 28-49, November.
    8. Kut C. So, 2000. "Price and Time Competition for Service Delivery," Manufacturing & Service Operations Management, INFORMS, INFORMS, vol. 2(4), pages 392-409, April.
    9. Bar{\i}\c{s} Ata & Jan A. Van Mieghem, 2009. "The Value of Partial Resource Pooling: Should a Service Network Be Integrated or Product-Focused?," Management Science, INFORMS, INFORMS, vol. 55(1), pages 115-131, January.
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