Department of Economics and Business Economics

Competing on price, speed, and reliability: How does bounded rationality matter?

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A firm’s delivery performance may have significant impact on the satisfaction and purchase behaviour of its customers. Empirical evidence has shown that customers are willing to pay a higher price for a faster and more reliable service. In this study, we address the interactions between the price, promised delivery time, and delivery-reliability level in a competitive setting. We model the problem as a competition among an arbitrary number of profit-maximizing firms facing boundedly rational customers who can choose to buy the service from one of the firms or balk. We prove the existence of a unique Nash equilibrium and propose a simple iterative algorithm that converges to the equilibrium. Furthermore, we compare our results with those in the existing literature and report interesting managerial insights. Our results suggest that having a clear understanding of customers’ bounded rationality level is crucial for businesses to determine their optimal decisions and position in the market both in monopolistic and competitive settings.
Original languageEnglish
JournalJournal of the Operational Research Society
ISSN0160-5682
DOIs
Publication statusE-pub ahead of print - 2020

    Research areas

  • Delivery reliability, Competition, Bounded rationality, Queueing, Pricing, Game theory

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ID: 191307733