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Product differentiation and operations strategy in a capacitated environment

Author

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

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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:ejores:v:210:y:2011:i:3:p:716-728
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    References listed on IDEAS

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    8. Tamer Boyaci & Saibal Ray, 2003. "Product Differentiation and Capacity Cost Interaction in Time and Price Sensitive Markets," Manufacturing & Service Operations Management, INFORMS, vol. 5(1), pages 18-36, May.
    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, vol. 55(1), pages 115-131, January.
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    Cited by:

    1. repec:spr:annopr:v:253:y:2017:i:1:d:10.1007_s10479-016-2353-7 is not listed on IDEAS
    2. repec:iim:iimawp:13011 is not listed on IDEAS
    3. repec:eee:proeco:v:193:y:2017:i:c:p:757-769 is not listed on IDEAS
    4. Jayaswal, Sachin, 2014. "Emergency Medical Service System Design under Service Level Constraints for Heterogeneous Patients," IIMA Working Papers WP2014-11-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
    5. Jayaswal, Sachin, 2014. "Priority Service System Optimization under Service Level Constraints," IIMA Working Papers WP2014-08-04, Indian Institute of Management Ahmedabad, Research and Publication Department.

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