Strategic Quality and Price Positioning of Delivery Services

Abstract

We analyze the profit optimal strategic positioning of new delivery services. Competing logistics service providers specify the service quality positioning of their offering upon market entry and subsequently compete on price. We represent this situation via a singleperiod spatial competition model with free anticipated and/or unanticipated entry of up to n non-cooperative players. Assuming quality positioning to be strategic and irreversible, we use a Stackelberg-Nash equilibrium approach where we implicitly account for price elasticity of demand for innovative delivery services by introducing a default offering in the market. Competitors face delivery cost determined by chosen service quality and obtained market share. In this setting, we derive optimal quality positioning and pricing policies for all players and analyze the effects of changes in the competitive landscape and of a shift in customer preferences on player behavior and profitability. By calibrating our model with operating data of the French national postal operator La Poste and applying it to a real-world decision problem regarding the introduction of an innovative urban delivery service in the city of Nantes, we demonstrate its managerial relevance. We show that cost structure disparities among competitors may have significant effects on their optimal quality positioning. An exogenous fixed cost may encourage competitors to pursue entry deterrence strategies.