Speed-quality trade-offs in a dynamic model

Kostami, V and Rajagopalan, S (2013) Speed-quality trade-offs in a dynamic model. Manufacturing and Service Operations Management, 16 (1). pp. 104-118. ISSN 1523-4614

Abstract

An important trade-off organizations face in many environments is one between quality and speed. Working faster may result in greater output and less delay, but may result in lower quality and dissatisfied customers. In this work, we consider dynamic models in a monopoly setting to explore the optimal balance among the multiple dimensions of speed, price, and wait time. The impact of quality is captured via the market demand potential, which is a function of the speed (quality) in the previous period. We obtain several results and insights. First, in scenarios where speed may be difficult to change over time (e.g., some automated production lines) but price can be changed, we show that the optimal price charged is such that the demand rate remains constant over time, even though the price and market potential are changing. Furthermore, we identify conditions when the firm will work at a speed that is higher or lower than a benchmark speed and characterize the behavior of prices over time. Second, in scenarios where a firm may not be able to change prices but can adjust the speed each period, the firm starts at a speed that may be faster or slower than a benchmark speed but converges to it over time. In this constant price case, as the benchmark speed increases, the initial speed adopted by the firm is actually lower but increases more quickly thereafter. We also characterize the behavior of price and speed in settings where both can be changed over time. Interestingly, a firm typically starts at a slow speed and increases the speed, price, and demand over time. Although our main model assumes that the firm internalizes the congestion cost, several of our results extend to a scenario where the demand rate is impacted by the congestion level.