Price and capacity competition of application services duopoly

Abstract.

In this paper, we study the price and capacity competition of two application service providers (ASPs). The customers realize an intrinsic time-independent value from transactions processed by the ASP. The cost to the customers includes both the price charged by the ASP and the delay cost due to turnaround time of the ASP service system. Customers will choose to join the ASP who delivers a higher net value of the service. This paper examines the competition between two ASPs and the impact of customers' delay cost on ASP's pricing and capacity decisions. We find that the ASP with higher capacity will charge a higher price and enjoy a larger market share and, surprisingly, that customers' delay cost has no direct impact on the arrival rates to the ASPs but affects the ASPs' pricing decisions. The ASPs will charge a higher price premium to capitalize customers' higher delay cost. For the long-run problem, we find that in the presence of higher customer's delay cost, both ASPs' optimal profits suffer, in contrast to the short-run problem where a higher customer's delay cost leads to a higher profitability for both ASPs.