Competitive location and capacity decisions for firms serving time-sensitive customers

In this article we explore how two competing firms locate and set capacities to serve time-sensitive customers. Because customers are time-sensitive, they may decline to place an order from either competitor if their expected waiting time is large. We develop a two-stage game where firms set capacities and then locations, and show that three types of subgame perfect equilibria are possible: local monopoly (in which each customer is served by a single firm, but some customers may be left unserved), constrained local monopoly (in which firms serve the entire interval of customers but do not compete with each other), and constrained competition (in which firms also serve the entire interval of customers, but now compete for some customers). We perform a comparative statics analysis to illustrate differences in the equilibrium behavior of a duopolist and a coordinated monopolist.