In this dissertation, we study the interplay between a firm’s operations strategy,
with regard to its capacity management, and its marketing decision of product differentiation. For this, we study a market comprising heterogeneous customers who
differ in their preferences for time and price. Time sensitive customers are willing
to pay a price premium for a shorter delivery time, while price sensitive customers are willing to accept a longer delivery time in return for a lower price. Firms exploit this heterogeneity in customers’ preferences, and offer a menu of products/services that differ only in their guaranteed delivery times and prices. From demand perspective, when customers are allowed to self-select according to their preferences, different products act as substitutes, affecting each other’s demand. Customized product for each segment, on the other hand, results in independent demand for
each product. On the supply side, a firm may either share the same processing capacity to serve the two market segments, or may dicate capacity for each segment. Our objective is to understand the interaction between product substitution
and the firm’s operations strategy (dedicated versus shared capacity), and how they shape the optimal product differentiation strategy.
To address the above issue, we first study this problem for a single monopolist
firm, which offers two versions of the same basic product: (i) regular product at
a lower price but with a longer delivery time, and (ii) express product at a higher
price but with a shorter delivery time. Demand for each product arrives according
to a Poisson process with a rate that depends both on its price and delivery time.
In addition, if the products are substitutable, each product’s demand is also influenced by the price and delivery time of the other product. Demands within each
category are served on a first-come-first-serve basis. However, customers for express
product are always given priority over the other category when they are served using
shared resources. There is a standard delivery time for the regular product,
and the firm’s objective is to appropriately price the two products and select the
express delivery time so as to maximize its profit rate. The firm simultaneously needs to decide its installed processing capacity so as to meet its promised delivery
times with a high degree of reliability. While the problem in a dedicated capacity
setting is solved analytically, the same becomes very challenging in a shared
capacity setting, especially in the absence of an analytical characterization of the
delivery time distribution of regular customers in a priority queue. We develop a
solution algorithm, using matrix geometric method in a cutting plane framework,
to solve the problem numerically in a shared capacity setting.
Our study shows that in a highly capacitated system, if the firm decides to
move from a dedicated to a shared capacity setting, it will need to offer more differentiated products, whether the products are substitutable or not. In contrast, when customers are allowed to self-select, such that independent products become
substitutable, a more homogeneous pricing scheme results. However, the effect of
substitution on optimal delivery time differentiation depends on the firm’s capacity strategy and cost, as well as market characteristics. The optimal response to any change in capacity cost also depends on the firm’s operations strategy. In a
dedicated capacity scenario, the optimal response to an increase in capacity cost is
always to offer more homogeneous prices and delivery times. In a shared capacity
setting, it is again optimal to quote more homogeneous delivery times, but increase
or decrease the price differentiation depending on whether the status-quo capacity
cost is high or low, respectively. We demonstrate that the above results are corroborated by real-life practices, and provide a number of managerial implications
in terms of dealing with issues like volatile fuel prices.
We further extend our study to a competitive setting with two firms, each of which may either share its processing capacities for the two products, or may dedicate capacity for each product. The demand faced by each firm for a given product now also depends on the price and delivery time quoted for the same product by the other firm. We observe that the qualitative results of a monopolistic setting also extend to a competitive setting. Specifically, in a highly capacitated system, the equilibrium prices and delivery times are such that they result in more differentiated products when both the firms use shared capacities as compared to the scenario when both the firms use dedicated capacities. When the competing firms are asymmetric, they exploit their distinctive characteristics to differentiate their products. Further, the effects of these asymmetries also depend on the capacity
strategy used by the competing firms. Our numerical results suggest that the firm
with expensive capacity always offers more homogeneous delivery times. However,
its decision on how to differentiate its prices depends on the capacity setting of the
two firms as well as the actual level of their capacity costs. On the other hand, the
firm with a larger market base always offers more differentiated prices as well as
delivery times, irrespective of the capacity setting of the competing firms.
| Identifer | oai:union.ndltd.org:WATERLOO/oai:uwspace.uwaterloo.ca:10012/4350 |
| Date | January 2009 |
| Creators | Jayaswal, Sachin |
| Source Sets | University of Waterloo Electronic Theses Repository |
| Language | English |
| Detected Language | English |
| Type | Thesis or Dissertation |
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