Pricing and Lead Time Competition in the Presence of Process Variability

Abstract

Managing variability in both arrival and production processes has been a central challenge for both manufacturing and service industries. Models have been proposed to study the negative impact of higher process variability on operational performance. In the make to order context, the variability can influence the lead time decision and hence both the tardiness costs and the chances of winning customer orders. In this paper, we investigate the strategic role of process variability. Specifically, we consider two make to order firms that have different variability characteristics and study how they affect the firm’s strategic decisions namely lead time and price and subsequently profits. We first show that the game has a unique Nash equilibrium by using super modularity and contraction-mapping methods. We then propose an algorithm that efficiently computes the Nash equilibrium. Numerical experiments demonstrate how the strategic influence of variability depends upon business and operational characteristics.