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Vol. 55, No. 4, April 2009, pp. 619–634 issn 0025-1909 eissn 1526-5501 09 5504 0619

MANAGEMENT SCIENCE

informs

®

doi 10.1287/mnsc.1080.0946 © 2009 INFORMS

Competition in Service Industries with Segmented Markets
Gad Allon
Kellogg School of Management, Northwestern University, Evanston, Illinois 60208, g-allon@kellogg.northwestern.edu

Awi Federgruen
Columbia Business School, Columbia University, New York, New York 10027, af7@columbia.edu

W

e 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 that accounts for the impact of the strategic choices of all competing firms. We distinguish between three types of competition: depending on whether firms compete on the basis of their prices only, waiting time standards only, or on the basis of prices and waiting time standards. 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. Key words: marketing; competitive strategy; noncooperative games; multichannel; queues History: Received December 7, 2004; accepted December 29, 2007, by Paul H. Zipkin, operations and supply chain management. Published online in Articles in Advance January 5, 2009.

1.

Introduction

We analyze the equilibrium behavior 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 rather disparate sensitivities to the price of service as well as to the delays encountered. Conversely, from the firm’s perspective it is vital to offer differentiated service charges and levels of service to different customer classes so as to maximize (long run) profits. Examples of industries with the above characteristics are numerous. Banks and credit card companies segment their customers into regular and VIP or Gold and Platinum customers. Computer software and hardware firms often segment their customers, for example, into Home and Home Office users, Small Businesses, Large Businesses and the Government, or Education and Health Care sectors, using an integrated pool of technical support personnel to serve the different customer segments according to a specific priority discipline; each customer segment is associated with a specific price and waiting time expectation. Finally, overnight delivery services use their planes and trucks to deliver letters, boxes, and 619

cargo, each with different prices and delivery time standards. In many service industries, waiting time standards are used as a primary advertised competitive instrument. For example, most major electronic brokerage firms (e.g., Ameritrade, Fidelity, E-trade) prominently feature the average or median execution speed per transaction, which is monitored by independent firms. Some firms go so far as to provide an individual execution time scorecard as part of the customer’s personal account statements. As a second example, in the airline industry, independent government agencies (e.g., the Aviation Consumer Protection Division of the DOT), as well as internet travel services (e.g., Expedia) report the average...
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