Centralized versus Decentralized Competition for Price and Lead-Time Sensitive Demand

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 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.