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Strategic behavior in a service industry

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Author Info
Pekka Ilmakunnas (Department of Economics, Helsinki School of Economics, Helsinki, Finland)

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Abstract

A model of service duopoly is formulated, where the arrival of customers and their service time in the firm are stochastic. The firms first choose the service capacity, and given the capacity they then choose the price in a Bertrand competition. Capacity choices have a negative externality on the competitor, since increased capacity in one firm decreases its expected full price (price plus cost of waiting) and leads to a flow of customers from the other firm. If the firms choose capacities strategically, it is optimal to underinvest compared to the non-strategic case, but this result may arise in different ways. By underinvesting the firms commit themselves to longer queues (lower quality) to relax price competition. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1047
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 23 (2002)
Issue (Month): 2 ()
Pages: 69-82
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Handle: RePEc:wly:mgtdec:v:23:y:2002:i:2:p:69-82

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Fershtman, Chaim & Gandal, Neil, 1994. "Disadvantageous semicollusion," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 141-154, June. [Downloadable!] (restricted)
    Other versions:
  2. Luski, Israel, 1976. "On Partial Equilibrium in a Queuing System with Two Servers," Review of Economic Studies, Blackwell Publishing, vol. 43(3), pages 519-25, October. [Downloadable!] (restricted)
  3. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December. [Downloadable!] (restricted)
  4. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February. [Downloadable!] (restricted)
  5. Ehud Kalai, 1990. "Optimal Service Speeds in a Competitive Environment," Discussion Papers 901, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  6. De Bondt, Raymond & Veugelers, Reinhilde, 1991. "Strategic investment with spillovers," European Journal of Political Economy, Elsevier, vol. 7(3), pages 345-366, October. [Downloadable!] (restricted)
  7. Levhari, David & Luski, Israel, 1978. "Duopoly pricing and waiting lines," European Economic Review, Elsevier, vol. 11(1), pages 17-35, February. [Downloadable!] (restricted)
  8. Davidson, Carl, 1988. "Equilibrium in Servicing Industries: An Economic Application of Queuing Theory," Journal of Business, University of Chicago Press, vol. 61(3), pages 347-67, July. [Downloadable!] (restricted)
  9. Reitman, David, 1991. "Endogenous Quality Differentiation in Congested Markets," Journal of Industrial Economics, Blackwell Publishing, vol. 39(6), pages 621-47, December. [Downloadable!] (restricted)
  10. De Vany, Arthur S & Saving, Thomas R, 1983. "The Economics of Quality," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 979-1000, December. [Downloadable!] (restricted)
  11. Kotaro Suzumura, 1993. "Competition, Commitment and Welfare," Discussion Paper Series a269, Institute of Economic Research, Hitotsubashi University.
  12. Richard C. Levin & Peter C. Reiss, 1988. "Cost-Reducing and Demand-Creating R&D with Spillovers," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 538-556, Winter. [Downloadable!] (restricted)
  13. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
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