Special Issue:

"The Marketing/Operations Management Interface"

Title: Price and Time Competition for Service Delivery

Author(s): Kut “Rick” So

Abstract: Many service firms use delivery time guarantees to compete for customers in the marketplace. In this research we develop a stylized model to analyze the impact of using time guarantees on competition. Demands are assumed to be sensitive to both the price and delivery time guarantees, and the objective of each firm is to select the best price and time guarantee to maximize its operating profit. We first show that a Nash equilibrium exists and then develop a simple iterative procedure to compute the equilibrium solution. Using a numerical study, we study how the different firm and market characteristics would effect the price and delivery time competition in the market. Our results suggest that the equilibrium price and time guarantee decisions in an oligopolistic market when identical firms behave in a similar fashion as the optimal solution in a monopolistic situation from a previous study. However, when there are heterogeneous firms in the market, these firms will exploit their distinctive firm characteristics to differentiate their services. The high capacity firms provide better time guarantees, while firms with lower operating costs offer lower prices, and the differentiation becomes more acute as demands become more time-sensitive. Furthermore, as time-attractiveness of the market increases, firms compete less on price, and the equilibrium prices of the firms increase as a result. Our findings provide important implications about firm behavior under price and time competition.

The Consulting Senior Editors were Morris Cohen and Josh Eliashberg

The manuscript was submitted on April 19, 1999, subject to four reviews with 89 days in revision. The average review cycle time was 70 days.

Corresponding author: Kut “Rick” So, University of California-Irvine, Graduate School of Management, Irvine, CA 92697-3125. Phone: 949-824-5054. E-mail: rso@uci.edu

Title: Supply Contract Competition and Sourcing Policies

Author(s): Wedad Elmaghraby

Abstract: As the nature of U.S. business’s changes and new business practices are adopted, it is necessary to build an understanding of how the new supply chain structures will work. As more companies are choosing to outsource the production of products, it becomes imperative to understand in what manner buyers are choosing their suppliers, how this new operational structure influences the actions of suppliers downstream, what types of incentives are being offered to suppliers and what their repercussions are on procurement costs, research and development activities. One medium frequently used to allocate production is an auction. This paper reviews the current literature in economics and operations research that addresses design issues in procurement auctions.

The Consulting Senior Editors were Morris Cohen and Josh Eliashberg

The manuscript was submitted on April 19, 1999, subject to three reviews with 212 days in revision. The average review cycle time was 90 days.

Corresponding author: Wedad Elmaghraby, Georgia Institute of Technology, School of IsyE, 765 Ferst Drive, Atlanta, GA. Phone: 404-894-2359. E-mail: welmaghr@isye.gatech.edu

Title: The Impact of an Integrated Marketing and Manufacturing Innovation

Author(s): Glen Schmidt

Abstract: Suppose you are a Marketing Manager envisioning a new product, or an Operations Manager contemplating a process improvement, or a CEO who commissioned an integrated new product development team. If our assumptions hold, our model offers you a single numerical measure, called the degree of product/process innovation, to determine your initiative’s impact on potential sales, prices, market segments, and profits. Our simple, single-period model is a variation of the existing vertically differentiated products model: There are two competing substitute products, and customers will buy at most one of them. Our contribution is to allow new relationships between the valuations of the two products by potential customers, and to allow differing unit production costs. We identify equilibrium results when two competing firms each offer one product, and find the profit maximizing result when one (monopolistic) firm offers both products. The new product infringes on the market in one of two ways: High-end encroachment results when the new product attracts the best customers (those with the highest reservation prices), while low-end encroachment identifies a situation where the new product attracts fringe (lower-end) customers. Low-end encroachment may help explain why an incumbent sometimes fails to recognize the threat of an entrant’s product, as we illustrate with an example from the disk drive industry. In short, we offer insight into the value of both a marketing objective (enhancing the product design attributes) and a manufacturing goal (lowering the production cost) in a product and/or process improvement project.

The Consulting Senior Editors were Morris Cohen and Josh Eliashberg

The manuscript was submitted on April 30, 1999, subject to four reviews with 214 days in revision. The average review cycle time was 74 days.

Corresponding author: Glen Schmidt, Georgetown University, McDonough School of Business, Washington, DC 20057. Phone: 202-687-4486. E-Mail: schmidtg@msg.edu

Title: An Analysis of Several New Product Performance Metrics

Author(s): Jehoshua Eliashberg, Teck Ho, and Morris Cohen

Abstract: For most firms, new product development is the engine for growth and profitability. A firm’s new product success depends on its ability to manage the product development process in a way that employs scarce resources to achieve the goal of the firm as well as the specific project’s objectives. Simple and measurable performance metrics have been proposed and applied in order to monitor and compensate the development teams. In this paper, we develop a modeling framework in order to analyze the implications of setting managerial priorities for three commonly used new product performance metrics:

  1. time-to-market
  2. product performance
  3. total development cost

We model new product development as a ‘product performance production’ process that requires scarce development resources. Setting a target for development teams for each of these performance metrics can constrain this performance production process and thereby affect the other performance metrics. We model the constrained process as a restricted case of a general process, which does not have such constraints.

We benchmark each constrained process against the optimal, unrestricted process with respect to the level of the resource intensity employed during the development process, the time-to-market, and the performance level of the new product at launch. We show that an overly ambitious time-to-market target leads to an upward bias in resource intensity usage and a downward bias in product performance (i.e., evolutionary product innovation.) In addition, our results suggest that the target time-to-market approach may ignore the effect of cannibalization and thus can perform suboptimally if a significant degree of cannibalization in the existing product market is expected. Given a target product performance, we show that the coordination between marketing and R&D is easier because the resulting development resource intensity and time to market decisions becomes separable. However, an overly ambitious product performance target leads to an upward bias in the development resource intensity and a delayed product launch that misses the window of opportunity. Finally, we show that the target development cost approach can lead a downward bias in product performance and a premature product launch. The above analyses are performed for a monopolistic firm and they are extended to passive and active competitive environment.

Key Words: New product development, product performance, time to market, development costs, performance metrics.

The Consulting Senior Editor was Stephen Graves

The manuscript was submitted on July 2, 1999, subject to four reviews with 269 days in revision. The average review cycle time was 50 days.

Corresponding author: Jehoshua Eliashberg, University of Pennsylvania, The Wharton School, Marketing Department, 1465 SH/DH, Locust Walk, Philadelphia, PA 19104-6371. Phone: 215-898-5246. E-mail: eliashberg@wharton.upenn.edu

Title: The Impact of Uncertainty and Risk Aversion on Price and Order Quantity in the Newsvendor Problem

Author(s): Sridhar Seshardi and Vipul Agrawal

Abstract: We consider a single period inventory model in which a risk averse retailer faces uncertain customer demand and makes a purchasing order quantity and selling price decision with the objective of maximizing expected utility. This problem is similar to the classic newsvendor problem, except, (a) the distribution of demand is a function of the selling price, which is determined by the retailer, and (b) the objective of the retailer is to maximize his/her expected utility. We consider two different ways in which price affects the distribution of demand. In the first model, we assume that a change in price affects the scale of the distribution. In the second model a change in price only affects the location of the distribution. We present methodology by which this problem with two decision variables can be simplified by reducing it to a problem in a single variable. We show that in comparison to a risk neutral retailer, a risk averse retailer in the first model will charge a higher price and order less. Whereas, in the second model a risk averse retailer will charge a lower price. Moreover, an increase in risk aversion leads to an increase in price in model 1 while resulting in a further lowering of price in model 2. The implications of these findings for supply chain strategy and channel design are discussed. Our research provides a better understanding of retailers pricing behavior leading to improved price contracts and channel management policies.

The Consulting Senior Editors were Morris Cohen and Josh Eliashberg

The manuscript was submitted on July 23, 1999, subject to four reviews with 205 days in revision. The average review cycle time was 60.5 days.

Corresponding author: Sridhar Seshardi, New York University, Leonard N. Stern School of Business, Operations Management Department, 40 W. 4th Street, Suite 700, New York, NY 10012-0258. Phone: 212-998-0294. E-mail: sseshadr@stern.nyu.edu

Title: Channel Dynamics Under Price and Service Competition

Author(s): Andy Tsay and Naren Agrawal

Abstract: This paper studies a distribution system in which a manufacturer supplies a common product to two independent retailers, who in turn use service as well as retail price to directly compete for end customers. We examine the drivers of each firm’s strategy, and the consequences for total sales, market share, and profitability. We show that the relative intensity of competition with respect to each competitive dimension plays a key role, as does the degree of cooperation between the retailers. We discover a number of insights concerning the preferences of each party regarding competition. For instance, there will be circumstances under which both retailers would prefer an increase in competitive intensity. Our analysis generalizes existing knowledge about manufacturer wholesale pricing strategies, and rationalizes behaviors that would not be evident without both price and service competition. Finally, we characterize the structure of wholesale pricing mechanisms that can coordinate the system, and show that the most commonly used formats (those that are linear in the order quantity) can achieve coordination only under very limiting conditions.

The Consulting Senior Editors were Morris Cohen and Josh Eliashberg

The manuscript was submitted on August 18, 1999, subject to three reviews with 165 days in revision. The average review cycle time was 78 days.

Corresponding author: Andy Tsay, Santa Clara University, Department of Operations and Management Information, Leavey School of Business, 500 El Camino Real, Santa Clara, CA 95053-0382. Phone: 408-554-4561. E-mail: atsay@scu.edu

Copies of these published papers may be downloaded from Informs Online