Competition in Service Industries with Segmented Markets

34 Pages Posted: 11 Jun 2006

See all articles by Gad Allon

Gad Allon

University of Pennsylvania - The Wharton School

Awi Federgruen

Columbia Business School - Decision Risk and Operations

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

We develop a model for the competitive interactions in service industries where firms cater to multiple customer classes or market segments with the help of shared service facilities or processes, so as to exploit pooling benefits. Different customer classes typically have distinct sensitivities to the price of service as well as the delays encountered. In such settings firms need to determine: (i) the prices charged to all customer classes, (ii) the waiting time standards, i.e. expected steady-state waiting time promised to all classes, (iii) the capacity level and (iv) a priority discipline enabling the firm to meet the promised waiting time standards under the chosen capacity level, all in an integrated planning model which accounts for the impact of the strategic choices of all competing firms. We distinguish between three types of competition: depending upon whether firms compete on the basis of their prices only, waiting time standards only, or, on the basis of price and waiting time standard. We establish in each of the three competition models that a Nash equilibrium exists under minor conditions regarding the demand volumes. We systematically compare the equilibria with those achieved when the firms service each market segment with a dedicated service process.

Keywords: Competition, Service, Industries, Segmented, Markets

Suggested Citation

Allon, Gad and Federgruen, Awi, Competition in Service Industries with Segmented Markets (January 2006). Available at SSRN: https://ssrn.com/abstract=907322 or http://dx.doi.org/10.2139/ssrn.907322

Gad Allon (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Awi Federgruen

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

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