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

We study two firms that compete based on their price and lead-time decisions in a common market. We explore the impact of the decentralization of these decisions, as quoted by the marketing and production departments, respectively, comparing three scenarios: (i) Both firms are centralized, (ii) only one firm is centralized, (iii) both firms are decentralized. We find that under intense price competition, firms may suffer from a decentralized strategy, particularly under high flexibility induced by high capacity, where revenue based sales incentives motivate sales/marketing for more aggressive price cuts resulting in eroding margins. On the other hand, when price competition in the market is less intense than lead-time competition, a decentralized decision making strategy may dominate a centralized decision making strategy.