We study a duopoly market in which customers are heterogeneous in their sensitivity
to price and leadtime, and can be segmented as price sensitive or time sensitive. Each
firm tailors (differentiates) its products/services for the two customer classes solely based
on price and the corresponding guaranteed leadtime. Our objective is to understand
how competition affects price and leadtime differentiation of the firms since the extant
literature reports very contradicting results. Our results suggest that when firms use
dedicated resources to serve the two market segments, pure price competition always
tends to decrease individual prices as well as price differentiation, irrespective of the
market behavior. Further, the effect of competition is more pronounced when customers
are allowed to self-select, thereby introducing substitutability between the two product
options. On the other hand, when firms compete in time, in addition to price, the effect of
competition on product differentiation depends crucially on the behavior of the market.
We further use our model to study the effects of asymmetry between the competing firms
on their product differentiation. Our results suggest that the firm with a larger market
base should always maintain a larger price and leadtime differentiation between the two
market segments. Similarly, the firm with a capacity cost advantage should also maintain
a larger leadtime differentiation.