Phillip J. Lederer

Pricing, Production, Scheduling, and Delivery-Time Competition

This paper studies competition between firms that produce goods or services for customers sensitive to delay time. Firms compete by setting prices and production rates for each type of customer and by choosing scheduling policies. The existence of a competitive equilibrium is proved. The competitive equilibrium is well defined whether or not a firm can differentiate between customers based upon physical characteristics because each customer has incentive to truthfully reveal its delay cost. Further insights are derived in two special cases. A unique equilibrium exists for each of the cases. In the first case, firms are differentiated by cost, mean processing time, and processing time variability, but customers are homogeneous. The conclusions include that a faster, lower variability and lower cost firm always has a larger market share, higher capacity utilization, and higher profits. However, this firm may have higher prices and faster delivery time, or lower prices and longer delivery time. In the second...

Spatial duopoly with discriminatory pricing

Abstract The concept and existence of an equilibrium is established for profit maximizing competitors whose decisions involve choices of both delivered price schedules and firm locations. Each firm faces a production function; each is allowed to locate in the plane and to set discriminatory prices. Any transport cost function that is continuous in the firm location variable may be used. It is shown that the locations of the two firms are in equilibrium if each firm is minimizing social cost (i.e., the total cost to the firms of supplying the market with the good it demands is minimized) with respect to the opponents fixed location.

A Competitive Network Design Problem with Pricing

This paper presents a simple model of competition between transport firms that captures the interaction of system design, price setting, and consumer choice. Transport competition is modeled as a noncooperative game where firms first select network designs, then prices for transportation between any two nodes. The goal is to find a Nash equilibrium in prices and system designs for all competing firms. Competition is studied under two alternate assumptions about consumer choice: customers can bundle separately purchased legs and customers cannot. If bundling cannot occur, it is shown that unique Nash equilibrium prices exist and that each firms profit can be written as the difference between two minimum cost flow problems. Sufficient conditions for the existence of equilibrium network designs are also developed. If bundling can occur, it is shown that a price equilibrium may not exist, and if it does, the price equilibrium may not be unique. Lack of existence or uniqueness implies that firm profit is not a well defined function of network designs. This shows that the network design problem with bundling is difficult. With bundling, some results are possible in the case of duopoly competition: an equilibrium in prices always exists but equilibrium prices may not be unique. However, when each firm chooses a network design to maximize the lower bound of its profit, the equilibrium network designs chosen are the same as those chosen when bundling is ignored.

Competitive Delivered Spatial Pricing

This paper contributes to the literature by studying price and production competition between spatially distributed profit maximizing firms. Firms compete by setting delivered prices, planning production, and sending output to each market. Both elastic demand and non-linear production costs are assumed. A non-cooperative game is defined, and its properties are characterized. We find spatial pricing patterns similar to those found by Hoover (1936). Existence and general properties of the Nash price and production equilibrium are shown and sufficient conditions that guarantee the existence of an unique price-production-transportation equilibrium are presented. A convergent algorithm is shown to find the equilibrium and is demonstrated with an example.

Uniform Spatial Pricing

Uniform spatial pricing means that a firm delivers its product to any customer at a fixed price, independent of location. Economic theory explains the use of uniform pricing by the added profit generated by absorbing freight charges of distant customers. I extend this insight by demonstrating that when demand elasticity and transportation cost are positively enough correlated, uniform pricing generates higher profits than mill pricing. I show that this result can better explain observed patterns of price policy choice by mail order and web firms. A second result is application of this idea to firms with many shipping facilities.

Competitive delivered pricing and production

Abstract This paper studies price and production competition between profit-maximizing firms that use delivered spatial prices. Firms produce an identical good and customers buy from the firm offering the least delivered price. Each firms transportation cost is quantity dependent and customers demands are price elastic. This contrasts with much of the literature on competitive spatial pricing that assumes inelastic customer demand and linear firm costs, and which ignores the firms production problem. This paper makes three contributions. First,a game-theoretic model is defined and the existence of the delivered price and production equilibrium is proved. Second, properties of the equilibrium are shown including patterns of spatial pricing. Properties of pricing and production are different from the case when transportation costs are quantity independent. For example, more than one firm may serve a single market. Third, it is shown that in equilibrium, competing firms may optimally choose delivered mill prices and have incentive to locate coincidentally. This result can explain coincident location of mill pricing firms.

Competitive Delivered Pricing by Mail-Order and Internet Retailers

Mail-order and internet sellers must decide how customers pay shipping charges. Typically, these sellers choose between two pricing policies: either “uniform pricing,” where the firm delivers to any customer at a fixed delivery charge (that may be volume dependent), or “mill pricing,” where the firm bills the customer a distance-related shipping charge. This paper studies price competition between a mail-order (or internet) seller and local retailers, and the mail-order firm’s choice of pricing policy. The price policy choice is studied when retailers do not change price in reaction to the mail-order firm’s policy choice, and when they do. In the second case, a two-stage non-cooperative game is used and it is found that for low customer willingness to pay, mill pricing is favored but as willingness to pay rises, uniform pricing becomes more attractive. These results are generalized showing that larger markets, higher transportation rates, higher unit production cost, and greater competition between retailers all increase profit under mill pricing relative to uniform pricing (and vice versa). On the other hand, cost asymmetries that favor the mail-order firm will tend to induce uniform rather than mill pricing. Some empirical data on retail and mail-order sales that confirm these results are presented.

Channel Strategy Evolution in Retail Banking

Information and banking technology have combined to throw the retail banking business model into disarray. Many predicted that lower cost online-oriented services such as Citibank’s Citi f/i venture would dominate the retail banking market and drive out high cost old technologies. The subsequent failure of Citi f/i and other virtual banks raises questions about how technology choice affects retail banking competition: Under what conditions would an online-only banking strategy be successful? When can a bank deploy both old and new technologies and still be competitive? Can an ATM network substitute for a branch network? Do customers’ attitudes about technology affect banking strategy? We use an economic model of a competitive retail banking market to address those and other questions. Our model allows banks to choose their technology, including establishing separate branch and ATM networks or relying on third party ATM networks. We also include customers that have differing attitudes toward technology. Our analysis suggests that customer preferences, rather than technology cost structure, drive the evolution of banks’ strategic technology choices. Also, banks in our model tend to deploy ATMs in the same numbers as branches, despite ATM’s cost advantages. Finally we show that virtual banks will remain unprofitable until a much larger proportion of the population is comfortable with online bank transaction technology. These results suggest that banks should carefully study their customers’ preferences to align major strategy shifts with customer attitudes.

A Service Provider's Elicitation of Its Customers’ Demand Distributions by a Price Mechanism

In a service environment a service provider needs to determine the amount and kinds of capacity to meet customers’ needs over many periods. To make good decisions, she needs to know the probability distribution of her customers’ demand in each period. We study a situation in which customers’ demand for a given service is random in each period, but inelastic, or modeled well by this assumption, and cannot be delayed to the next period. This article presents a mechanism that allows a service provider to learn the distribution of a customer’s demand by offering him a set of contracts through which he can partially prepay for future service for a reduced cost for units of service based on anticipated needs. We describe the form of a set of contracts that will cause the customer to reveal his demand distribution as he minimizes his expected costs. To justify the effort of organizing and offering contracts, we present an application that demonstrates the cost savings to the service provider with better capacity planning using the truthfully elicited distribution. [Submitted: December 23, 2010. revisions: July 11, 2011, August

Branch bank network structure with electronic transactions considerations

The paper applies an economic model of a competitive market for retail banking services to generate insights into the following relevant questions. Is the cost structure of electronic distribution systems sufficient to justify choosing the kiosk/PC banking distribution strategy? That is, is it reasonable that market pressures and technological advances will allow banks to virtually eliminate branches? How does competition from other banks and non-bank firms affect the choice of distribution strategy? We find that in a wide variety of experiments that banks will retain their branch networks, along with a PC banking capability.