Impact of logistics capacity on duopoly competition: Implications for firms and consumers

Abstract

Price promotion is an effective way to capture market share, as consumer sensitivity to price is universal. Yet, consumer satisfaction with services‐such as logistics‐plays a critical role. Deep price discounts can indeed spike demand, but they can also congest systems, thus prolonging delivery times and diminishing consumer satisfaction. Despite observed significant effects of logistics capacity on consumer and firm payoffs in logistics systems in recent years, economic and operational analysis of these effects remains under explored. This study theoretically examines the influence of logistics capacity on competition between two firms using a refined Hotelling model that incorporates system congestion via a BPR‐type congestion function. Our primary findings include: First, the possibility of multiple equilibria emerges with intermediate product values, fueled by either unilateral price reductions to seize greater market share or price increases to enhance marginal benefits. Moreover, a firm with superior logistics capacity may not always set higher prices at equilibrium. Second, we show that equilibrium pricing exhibits a non‐monotonic relationship with logistics capacity and market size. Lastly, we scrutinize firms' long‐term strategic reactions to changes in logistics capacity and the implications of marginal capacity costs, symmetric or otherwise. Our findings provide the following insights. We caution that the equilibrium pricing strategy is ambiguous when the product value is not extreme because both firms are more likely to engage in random price wars. Intriguingly, while augmenting logistics capacity might elevate service satisfaction, it could paradoxically reduce firm revenue or consumer surplus. Our analysis also indicates that higher marginal capacity costs could, counter intuitively, benefit firms or consumers.