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Competing on price, speed, and reliability: How does bounded rationality matter?

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  • Ata Jalili Marand
  • Hongyan Li
  • Anders Thorstenson

Abstract

A firm’s delivery performance may have significant impact on the satisfaction and purchase behaviour of its customers. Empirical evidence has shown that customers are willing to pay a higher price for a faster and more reliable service. In this study, we address the interactions between the price, promised delivery time, and delivery-reliability level in a competitive setting. We model the problem as a competition among an arbitrary number of profit-maximizing firms facing boundedly rational customers who can choose to buy the service from one of the firms or balk. We prove the existence of a unique Nash equilibrium and propose a simple iterative algorithm that converges to the equilibrium. Furthermore, we compare our results with those in the existing literature and report interesting managerial insights. Our results suggest that having a clear understanding of customers’ bounded rationality level is crucial for businesses to determine their optimal decisions and position in the market both in monopolistic and competitive settings.

Suggested Citation

  • Ata Jalili Marand & Hongyan Li & Anders Thorstenson, 2021. "Competing on price, speed, and reliability: How does bounded rationality matter?," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 72(9), pages 2059-2072, September.
    • Handle: RePEc:taf:tjorxx:v:72:y:2021:i:9:p:2059-2072
    DOI: 10.1080/01605682.2020.1759384
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    Cited by:

    1. Xiaoqin Wen & Chenhanzhi Wang, 2022. "Optimal-Quality Choice and Committed Delivery Time in Build-To-Order Supply Chain," Sustainability, MDPI, vol. 14(18), pages 1-20, September.

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