When do firms benefit from joint price and lead-time competition?

Abstract

Motivated by the observation that more and more firms are now using lead-time guarantee as a new competitive weapon to attract customers, we study firms’ optimal decisions in prices and lead-time quotations when they compete in these two dimensions for demand. We formulate a simultaneous game between multiple firms that sell substitutable products to the same market, and customer demand is determined by both prices and lead-time quotations of all firms. We fully characterize the existence and uniqueness of the Nash equilibrium, and use analytical results supplemented by comprehensive numerical examples to understand the impact of competition. Our research yields two key counterintuitive findings. First, although on the surface price and lead-time shape the demand function in a similar fashion, competition in these two dimensions drives equilibrium price and lead-time quotation in opposite directions. In particular, price competition decreases price but increases lead-time quotation, whereas lead-time competition increases price but decreases lead-time quotation. Second, under joint price and lead-time competition, if the relative price and lead-time competition intensities are disparate, firms can benefit from increased competition in the weaker dimension. The intuition is that increased competition in the weaker dimension diffuses the tensions between the firms in the stronger competition dimension, mitigating its negative impact on profit. To the best of our knowledge, we are among the first to identify conditions under which firms can gain from intensified competition.