Product differentiation and capacity cost interaction in time and price sensitive markets

In this paper, the authors investigate the impact of capacity costs on the optimal product positioning and differentiation decisions of a monopolist firm selling two variants of a make-to-order product/service in a price and time sensitive market. The objective of the firm is to determine the delivery time of the faster product and the prices of each product, taking into account the impact on capacity requirements and the associated costs. The work provides insights on the interaction of capacity decisions with pricing and delivery time decisions, as well as how to do optimal differentiation in these dimensions. The work is among the first to provide a detailed study of the interaction between capacity and product positioning/differentiation decisions. It also provides practical insights into how time-based differentiation and segmented pricing are affected by capacity constraints and cost. For example, the results show that managers have to take into account not only the absolute capacity costs, but also the capacity cost differential between the two products, and higher capacity costs do not necessarily lead to higher prices and more price differentiations.