Impact of Logistics Capacity on Duopoly Competition : Implications for Firm and Consumer Surplus

Problem definition: Price promotion is an efficient way to gain the market share due to the fact that all consumers are price sensitive. Even so, consumers are also sensitive to the service satisfaction, e.g., logistic service. Fierce price promotion can boost demand, but also makes the system more congested, which prolongs the delivery time and therefore lowers the service satisfaction of consumers. Recent years have witnessed the significant impact of logistics capacity on the payoffs of both consumers and firms in logistic service systems, but little is known about its economic and operational characteristics in the literature. Methodology: This paper theoretically explores the impact of logistics capacity on the competitions between two firms through a stylized Hotelling model by considering the congestion level of system using BPR-type congestion function. Results: First, it reveals that multiple equilibria can exist when the product value is intermediate, which is driven by the unilateral motives to either capture more market share by cutting down the prices or to improve the service satisfaction of consumers by raising prices. We also indicate that, the firm with a higher logistics capacity does not necessarily adopt a higher price than its competitor in equilibrium. Second, when both firms own the resemble logistics capacity, the unique symmetric equilibrium price is characterized, which is found to be non-monotone in the logistics capacity and market size. And the implications for revenue and consumers surplus are uncovered. Finally, we identify the long-run strategic response of firms to the logistics capacity, and the effect of marginal capacity cost is examined. Managerial implications: In the short run, we caution that the equilibrium pricing strategy is equivocal when the product value or logistics capacity is non-extreme, where firms are more likely to engage in random price promotion wars. It reveals that, somewhat interestingly, despite the potential benefits of expanding logistics capacity in improving the service satisfaction of consumers, a higher logistics capacity may worsen the revenue of firm or the consumer surplus. In the long run, it suggests that firms or consumer population can be better off with a higher marginal capacity cost