Price Competition, Capacity Decisions, and Information Asymmetry

195 pagesIn business, most of the decisions are made in the context of strategic interactions that inevitably lead to intertwined individual incentives. From consumers to upstream firms in supply chains, people make decisions for their own best interests as suppliers, manufacturers, and consumers. In this dissertation, I study a firm’s strategic decisions in the areas of the operations-marketing interface and supply chain management in order to predict and understand firms’ behaviors in a competitive setting or in the presence of information asymmetry. In Chapter 1, I first examine a price competition problem (e.g., promotion wars) in which customer satisfaction depends on a firm’s available service capacity. Price competition has been commonly observed in the online retail industry. Firms cut their prices despite incurring an immediate financial loss, hoping to lock in customers for future profit. While such a practice is prevalent, our understanding of the role of service capacity in firms’ price promotion strategy is lacking, especially when customers’ purchase experience may be negatively affected by firms’ limited service capacity. I revisit the classic two-firm, two-period price competition model, adding a switching cost and showing that a firm’s price strategies depend on the level of the competitor’s service capacity. In Chapter 2, I extend the previous model to a capacity-risk problem in which capacity is stochastic and the information about a firm’s own capacity capability could be private. I solve for the Bayesian Nash equilibrium to demonstrate the firm’s price decisions in the presence of information asymmetry. This model verifies that knowing the capacity information will benefit firms but can also dramatically affect a firm’s price decisions with respect to service capacity capability (e.g., superior capacity and inferior capacity). In Chapter 3, I finally study a problem that is common in both practice and research – evaluating capacity decisions in a supply chain in the presence of persistent information asymmetry between a firm and its suppliers. I solve for the Perfect Bayesian Nash equilibrium to characterize a firm’s strategic capacity decisions, which can signal the firm’s demand type. I find that information asymmetry can harm supply chain efficiency. As a solution, I design a well-structured equity sharing contract to improve supply chain efficiency as well as to reduce suppliers’ risks