Could Early Warning Combat Demand Disruption Caused by Endemics and Pandemics? Benefit and Dilemma Analysis

Confronting demand disruption caused by endemics and pandemics, companies are suggested to adopt early warning systems (EWSs), which enable them to make preparedness efforts based on the received early warning and mitigate demand disruption. However, concerns over intensified competition and costs might curb the companies’ EWS adoption incentives. In this article, we develop a game-theoretic model to study two symmetric companies’ EWS adoption decisions, in which they engage in two-dimensional competition in preparedness effort and production quantity. Interestingly, we find that two symmetric companies may have distinct adoption decisions, which results in asymmetric equilibria. In such asymmetric equilibria, the companies engage in diversified competition. The one who adopts the EWS benefits from cost-saving and a larger market share at the expense of a moderate implementation cost. We further find that because of head-to-head competition, the two companies may be trapped in a prisoner's dilemma when both of them adopt the EWS. The cost efficiency of preparedness efforts also plays a critical role in the companies’ adoption decisions. Higher preparedness effort efficiency may first encourage and then discourage the companies’ EWS adoption. Our study sheds light on the interaction between the benefits of EWS adoption and the backfire stemming from competition.