Price and service competition with consumer behavior
by Zheng Song
Ph.D. Industrial Engineering and Logistics Management
x, 74 p. : ill. ; 30 cm
This thesis investigates two issues in operations management. The first one is dynamic price and service competition when consumers learn. We study it under two market environments: the market with and without dominant firms. The second one is price and quality competition with reference-dependent preference....[ Read more ]
This thesis investigates two issues in operations management. The first one is dynamic price and service competition when consumers learn. We study it under two market environments: the market with and without dominant firms. The second one is price and quality competition with reference-dependent preference.
We consider a market consisting of a large number of competing service facilities. They provide products at different prices and different waiting times. Consumers tradeoff between the price and the waiting time and make purchase decisions. Particularly, unlike prices, services are experienced only after consumers purchase products. Hence, previous shopping experiences greatly influence consumers’ estimates of the waiting times of different firms. First, we study firms’ strategies on price and service in the market without dominant firms when consumers learn. We model how customers learn about service and imbed this learning process into firms’ selection of price and service over time. We then explore how firms tradeoff between prices and services in an evolving dynamic game. We also examine how the long-run equilibrium price and service are affected by customer learning behavior, their sensitivity to price and service, and capacity cost structures.
Second, we study firms’ strategies on price and service in the market with dominant firms. We investigate how the market structure affects firms’ optimal strategy of price and service. Particularly, when the market is highly concentrated (i.e., there is a dominant firm), how does it shift the average industry state and the gaming behavior of competing firms? We analyze optimal strategies of both the dominant firm and fringe firms. We show that optimal strategies may converge or oscillate under different situations. We also investigate the interaction of price and service between the dominant firm and fringe firms.
Finally, we study a model of two firms offering differentiated products in a covered duopoly market. They simultaneously choose the quality of the product and then compete in price. Customers decide which firm to purchase from based on a general utility function comprised of the standard consumption utility and the comparative utility which captures the reference-dependent value. We investigate the optimal pricing and quality decisions for each firm under the reference dependency effect. We also study the impact the reference dependency has on the market share and profit of each firm.