Centralized vs. Decentralized Competition for Price and Lead-Time Sensitive Demand

Decision Sciences, Forthcoming

33 Pages Posted: 10 Oct 2016

See all articles by Pelin Pekgun

Pelin Pekgun

Wake Forest University - Schools of Business

Paul M. Griffin

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

Pinar Keskinocak

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

Date Written: October 6, 2016

Abstract

We study two firms that compete on price and lead-time decisions in a common market. We explore the impact of decentralizing these decisions, as made by the marketing and production departments, respectively, with either marketing or production as the leader. We compare scenarios in which none, one, or both of the firms are decentralized to see whether decentralization can be the equilibrium strategy. We find that under intense price competition, with intensity characterized by the underlying parameters of market demand, firms may suffer from a decentralized structure, particularly under high flexibility induced by high capacity, where revenue based sales incentives motivate sales/marketing to make aggressive price cuts that often erode profit margins. In contrast, under intense lead-time competition, a decentralized strategy with marketing as the leader can not only result in significantly higher profits, but it can also be the equilibrium strategy. Moreover, decentralization may no longer lead to lower prices or longer lead-times if the production department chooses capacity along with lead-time.

Keywords: marketing-manufacturing interface, price, lead-time, competition, decentralized decision-making

Suggested Citation

Pekgun, Pelin and Griffin, Paul M. and Keskinocak, Pinar, Centralized vs. Decentralized Competition for Price and Lead-Time Sensitive Demand (October 6, 2016). Decision Sciences, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2850018

Pelin Pekgun (Contact Author)

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

Paul M. Griffin

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )

765 Ferst Drive
Atlanta, GA 30332-0205
United States
404-894-2431 (Phone)

Pinar Keskinocak

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )

765 Ferst Drive
Atlanta, GA 30332-0205
United States

HOME PAGE: http://www2.isye.gatech.edu/people/faculty/Pinar_Keskinocak/

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