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Price and Time Competition for Service Delivery

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  • Kut C. So

    ()
    (Graduate School of Management, University of California, Irvine, California 92697)

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    Abstract

    Many service firms use delivery time guarantees to compete for customers in the marketplace. In this research we develop a stylized model to analyze the impact of using time guarantees on competition. Demands are assumed to be sensitive to both the price and delivery time guarantees, and the objective of each firm is to select the best price and time guarantee to maximize its operating profit. We first analyze the optimization problem for the individual firms and then study the equilibrium solution in a multiple-firm competition. Using a numerical study, we further illustrate how the different firm and market characteristics would affect the price and delivery time competition in the market. Our results suggest that the equilibrium price and time guarantee decisions in an oligopolistic market with identical firms behave in a similar fashion as the optimal solution in a monopolistic situation from a previous study. However, when there are heterogeneous firms in the market, these firms will exploit their distinctive firm characteristics to differentiate their services. Assuming all other factors being equal, the high capacity firms provide better time guarantees, while firms with lower operating costs offer lower prices, and the differentiation becomes more acute as demands become more time-sensitive. Furthermore, as time-attractiveness of the market increases, firms compete less on price, and the equilibrium prices of the firms increase as a result. Our findings provide important implications about firm behaviour under price and time competition.

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    File URL: http://dx.doi.org/10.1287/msom.2.4.392.12336
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    Bibliographic Info

    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 2 (2000)
    Issue (Month): 4 (April)
    Pages: 392-409

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    Handle: RePEc:inm:ormsom:v:2:y:2000:i:4:p:392-409

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    Related research

    Keywords: time-based competition; price competition; service guarantees; competitive games;

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    Cited by:
    1. Ülkü, M. Ali & Bookbinder, James H., 2012. "Optimal quoting of delivery time by a third party logistics provider: The impact of shipment consolidation and temporal pricing schemes," European Journal of Operational Research, Elsevier, vol. 221(1), pages 110-117.
    2. Marzieh Shahmari Chatghieh & Harri Haapasalo & Anyanitha Distanont, 2013. "Comparing Manufacturing and Services Sourcing against R&D Sourcing," Diversity, Technology, and Innovation for Operational Competitiveness: Proceedings of the 2013 International Conference on Technology Innovation and Industrial Management, ToKnowPress.
    3. Ramesh Johari & Gabriel Weintraub, 2007. "Competition in Prices and Service Level Guarantees," Working Papers 07-21, NET Institute, revised Sep 2007.
    4. Tang, Christopher S., 2010. "A review of marketing-operations interface models: From co-existence to coordination and collaboration," International Journal of Production Economics, Elsevier, vol. 125(1), pages 22-40, May.
    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, vol. 153(3), pages 769-781, March.
    6. Xu, He & Yao, Nian & Tong, Shilu, 2013. "Sourcing under cost information asymmetry when facing time-sensitive customers," International Journal of Production Economics, Elsevier, vol. 144(2), pages 599-609.
    7. Jayaswal, Sachin & Jewkes, Elizabeth & Ray, Saibal, 2011. "Product differentiation and operations strategy in a capacitated environment," European Journal of Operational Research, Elsevier, vol. 210(3), pages 716-728, May.
    8. Elahi, Ehsan, 2013. "Outsourcing through competition: What is the best competition parameter?," International Journal of Production Economics, Elsevier, vol. 144(1), pages 370-382.
    9. Marzieh ShahmariChatghieh & Harri Haapasalo & Anyanitha Distanont, 2013. "A Comparison of R&D Supply Chains and Service and Manufacturing Supply Chains," International Journal of Synergy and Research, ToKnowPress, vol. 2(2), pages 73-91.
    10. Huang, Yeu-Shiang & Chen, Si-Hen & Ho, Jyh-Wen, 2013. "A study on pricing and delivery strategy for e-retailing systems," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 59(C), pages 71-84.
    11. Qian, Li, 2014. "Market-based supplier selection with price, delivery time, and service level dependent demand," International Journal of Production Economics, Elsevier, vol. 147(PC), pages 697-706.
    12. Lu, Jye-Chyi & Tsao, Yu-Chung & Charoensiriwath, Chayakrit, 2011. "Competition under manufacturer service and retail price," Economic Modelling, Elsevier, vol. 28(3), pages 1256-1264, May.

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