Service Competition, Outsourcing and Co-Production in a Queuing Game

Gérard P. Cachon and Patrick T. Harker

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: This paper studies competition between two firms that service time sensitive customers. Customers choose firms based on the firms' prices, the firms' expected waiting and service times, and the firms' brands. The firms may choose diverse strategies: one could choose a high price, but serve customers quickly, whereas the other could choose a low price with slow service. We consider three "service supply chain" design configurations: the firms perform the service, the firms outsource the service to a contractor, or the firms outsource the service to their customers; i.e., customers become co-producers of the service. With the first, there exists only one Nash equilibrium in prices and capacities (processing rates) in which both firms have positive market share. If the firms' costs are identical, the firms adopt identical strategies. If one firm has a lower cost, then that firm serves customers more quickly and has a higher market share, even though it might have a higher price. The outsourcing configurations might raise the firms' costs: outsourcing to a contractor requires coordination and monitoring; customers agree to co-production only if they receive a price break, but customers might be less efficient than the firms. Nevertheless, even if either outsourcing configuration raises the firms' costs, we show that the firms may be strictly better off because outsourcing raises equilibrium prices. This benefit is particularly valuable in highly competitive markets.

Date: 1999-03
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