The Effect of Competition on the Efficient-Responsive Choice

In determining their operations strategy, a firm chooses whether to be responsive or efficient. For firms competing in a market with uncertain demand and varying intensity of substitutability for the competitor's product, we characterize the responsive or efficient choice in equilibrium. To focus first on the competitive implications, we study a model where a firm can choose to be responsive at no additional fixed or marginal cost. We find that competing firms will choose the same configuration (responsive or efficient), and responsiveness tends to be favorable when demand uncertainty is high or when product competition is not too strong. Intense competition can drive firms to choose to be efficient rather than responsive even when there is no additional cost of being responsive. In such a case, both firms would be better off by choosing to be responsive but cannot credibly commit. We extend the basic model to study the impact of endogenized production timing, multiple productions and product holdback (or, equivalently, postponed production). For all these settings, we find structurally similar results; firms choose the same configuration, and the firms may miss Pareto-improvements. Furthermore, through extensions to the basic model, we find that greater operational flexibility can make responsiveness look less attractive in the presence of product competition. In contrast to our basic model and other extensions, we find it is possible for one firm to be responsive while the other is efficient when there is either a fixed cost or variable cost premium associated with responsive delivery.