Price and Time Competition for Service Delivery

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.