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Service Co-Production, Customer Efficiency and Market Competition

  • Mei Xue
  • Patrick T. Harker
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Customers’ participation in service co-production processes has been increasing with the rapid development of self-service technologies and business models that rely on self-service as the main service delivery channel. However, little is known about how the level of participation of customers in service delivery processes influences the competition among service providers. In this paper, a game-theoretic model is developed to study the competition among service providers when selfservice is an option. The analysis of the equilibria from this model shows that, given a certain level of customer efficiency, the proportion of the service task outsourced to the customer is a decisive factor in the resulting competitive equilibria. In the long run, two extreme formats of service delivery are expected to prevail rather than any mixture of both: either complete employee service or complete self-service. In the two-firm queuing game, we find that both firms are better off when they both deliver their service through self-service. It is also shown that full-service providers dominate the market if firms providing service products featuring self-service fail to have enough market demand at a profitable price. Meanwhile, the limited ranges of customer efficiency and the price for the self-service-only product are shown to be essential conditions for the coexistence of the different types of service providers.

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File URL: http://fic.wharton.upenn.edu/fic/papers/03/0303.pdf
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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 03-03.

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Date of creation: Jan 2003
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Handle: RePEc:wop:pennin:03-03
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  1. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
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  11. George Baker & Robert Gibbons & Kevin J. Murphy, 2001. "Bringing the Market inside the Firm?," American Economic Review, American Economic Association, vol. 91(2), pages 212-218, May.
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  13. Shaler Stidham, 1992. "Pricing and Capacity Decisions for a Service Facility: Stability and Multiple Local Optima," Management Science, INFORMS, vol. 38(8), pages 1121-1139, August.
  14. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
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