The Strategic Perils of Delayed Differentiation

32 Pages Posted: 27 Mar 2010

See all articles by Karan Girotra

Karan Girotra

Cornell Tech; Cornell SC Johnson College of Business

Krishnan S. Anand

affiliation not provided to SSRN

Date Written: May 2007

Abstract

The value of delayed differentiation (aka postponement) for a monopolist has been extensively studied in the Operations literature. We analyze the case of (imperfectly) competitive markets with demand uncertainty, wherein the choice of supply chain configuration (early/delayed differentiation) is endogenous to the competing firms. We characterize firms' choices in equilibrium and analyze the effects of these choices on quantities sold, profits, consumer surplus and welfare. We demonstrate that purely strategic considerations not identified previously in the literature play a pivotal role in determining the value of delayed differentiation. In the face of either entry threats or competition, these strategic effects can significantly diminish the value of delayed differentiation. In fact, under plausible conditions, these effects dominate the traditional risk-pooling benefits associated with delayed differentiation, in which case early differentiation is the dominant strategy for firms, even under cost parity with delayed differentiation. We extend the main model to study the effects of alternate market structures, asymmetric markets and inventory holdback. Our results, in particular that for a broad range of parameter values early differentiation is a dominant strategy even under cost parity with delayed differentiation, are robust to these relaxations.

Keywords: Postponement, Flexibility, Strategic Committment, Supply Chain Management

Suggested Citation

Girotra, Karan and Anand, Krishnan S., The Strategic Perils of Delayed Differentiation (May 2007). Available at SSRN: https://ssrn.com/abstract=1574130 or http://dx.doi.org/10.2139/ssrn.1574130

Karan Girotra (Contact Author)

Cornell Tech ( email )

111 8th Avenue #302
New York, NY 10011
United States

HOME PAGE: http://www.girotra.com

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

HOME PAGE: http://www.girotra.com

Krishnan S. Anand

affiliation not provided to SSRN ( email )

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