Online traffic games: Should firms compete on website speed or website capacity?

Abstract

In today’s fast-paced digital world, consumers demand instant access to online content and are intolerant of delays, making website speed a key competitive advantage in attracting web traffic. Google’s Speed Update and Core Web Vitals have further emphasized the significance of website speed in web traffic competition. This study examines how firms strategically compete for web traffic by managing website speed, focusing specifically on two distinct strategies: response-based and capacity-based. Under response-based competition, firms first set their desired website speed (or equivalently, website response time), subsequently determining the necessary website capacity. In contrast, in capacity-based competition, firms initially select the website capacity level, which in turn determines the website response time. We analyze a duopoly scenario in which two firms compete for web traffic. Although website speed and capacity are functionally related, surprisingly, firms sometimes compete more aggressively under response-based competition. Interestingly, the aggression of response-based competition can sometimes increase firms’ profits. We also show that when firms freely choose the decision process, firms sometimes engage in a mode of competition in equilibrium, which yields a lower profit for the capacity provider (e.g., computing capacity provider) than the alternative mode. We further show how the cloud provider can increase profit by strategically inducing firms to engage in a preferred mode of competition. This is achieved by lowering the unit price of renting capacity related to that mode of competition. This strategic price reduction can lead to faster websites for consumers, an increase in the provider’s revenue, and consequently an increase in the cloud provider’s profit under a cost-efficiency condition. The profit of firms can sometimes increase too, implying a win-win-win for all the parties, namely, firms, consumers, and the provider.