The Impact of Capacity Costs on Product Differentiation in Delivery Time, Delivery Reliability and Price

Abstract

We develop an analytical framework for studying the role capacity costs play in shaping the optimal differentiation strategy in terms of prices, delivery times, and delivery reliabilities of a profit-maximizing firm selling two variants (express and regular) of a product in a capacitated environment. We first investigate three special cases. The first is an existing model of price and delivery time differentiation with exogenous reliabilities, which we only review. The second focuses on time-based (i.e., length and reliability) differentiation with exogenous prices. The third deals with deciding on all features for an express variant when a regular product already exists in the marketplace. We subsequently address the integrative framework of time-and-price-based differentiation for both products in a numerical study. Our results shed light on the role that customer preferences towards delivery times, reliabilities and prices, and the capacity costs (absolute and relative) have on the firm's optimal product positioning policy.