Optimal Pricing and Capacity Investment for Delay-Sensitive Demand

Abstract

We study a firm's joint decisions on product prices, delivery lead times, and capacity investments of the production facility. We assume customers are strategic and heterogeneous in their sensitivity to waiting. The firm can offer a single service to all customers or two services with different delivery lead times and prices. We investigate a firm's optimal decisions when the firm is a monopolist or under a duopoly competition. We find that a monopoly firm's optimal capacity level decreases in service level. For a monopoly firm providing differentiated services, we find that the optimal facility utilization level does not depend on unit capacity cost. Furthermore, we demonstrate that a monopoly firm always gets more profits by providing differentiated services than a single service. For duopoly competition, we show the existence of a Nash equilibrium. Finally, we illustrate that a firm offering shorter lead time quotation may earn less profit than one offering longer lead time quotation when two firms compete in an industry with discrete lead times.

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