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Promised Delivery Time and Capacity Games in Time-Based Competition

  • Weixin Shang

    ()

    (School of Management, Fudan University, Shanghai 200433, China)

  • Liming Liu

    ()

    (Faculty of Business, Hong Kong Polytechnic University, Hong Kong, China)

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    We investigate firms' competitive behaviors in industries where customers are sensitive to both promised delivery time (PDT) and quality of service (QoS) measured by the on-time delivery rate. To study the competition in PDT at the marketing level, we construct an oligopoly game with an external QoS requirement. We show that there exists a unique Nash equilibrium, and the equilibrium QoS exhibits a switching surface structure with respect to capacities. To study the competition in capacity at the strategic level, we construct a two-stage game in which the firms compete in terms of their capacities in stage 1 and in terms of PDT in stage 2. We show the existence of two different types of pure strategy equilibria and characterize them. This study provides the following insights: an index of time-based competitive advantage (ITCA) and the first-mover advantage determine the positions of the firms in time-based competition; either the well-known prisoner's dilemma or off-equilibrium behaviors due to different preferences for equilibria (when multiple equilibria exist) may lead the firms to overinvest in capacity, but no one may gain a competitive advantage; a uniform improvement in internal efficiency (i.e., a uniform capacity cost reduction) may harm everyone; quality differentiation (i.e., going beyond the QoS benchmark) plays a dual role in time-based competition, either helping a firm with a larger ITCA to compete more effectively, or helping a firm possibly with a smaller ITCA to preempt competitors and protect its market advantage. This paper was accepted by Paul H. Zipkin, operations and supply chain management.

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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1292
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 57 (2011)
    Issue (Month): 3 (March)
    Pages: 599-610

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    Handle: RePEc:inm:ormnsc:v:57:y:2011:i:3:p:599-610
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