Efficiency Analysis of Cournot Competition in Service Industries with Congestion

We consider Cournot competition in the presence of congestion effects. Our model consists of several service providers with differentiated services, each competing for users who are sensitive to both price and congestion. We distinguish two types of congestion effects, depending on whether spillover costs exist, that is, where one service provider's congestion cost increases with the other providers' output level. We quantify the efficiency of an unregulated oligopoly with respect to the optimal social welfare with tight upper and lower bounds. We show that, when there is no spillover, the welfare loss in an unregulated oligopoly is limited to 25% of the social optimum, even in the presence of highly convex costs. On the other hand, when spillover cost is present, there does not exist a constant lower bound on the efficiency of an unregulated oligopoly, even with affine cost. We show that the efficiency depends on the relative magnitude between the marginal spillover cost and the marginal benefit to consumers

Service and price competition when customers are naive

We consider a system of two service providers each with a separate queue. Customers choose one queue to join upon arrival and can switch between queues in real time before entering service to maximize their spot utility, which is a function of price and queue length. We characterize the steady-state distribution for queue lengths, and then investigate a two-stage game in which the two service providers first simultaneously select service rates and then simultaneously charge prices. Our results indicate that neither service provider will have both a faster service and a lower price than its competitor. When price plays a less significant role in customers service selection relative to queue length or when the two service providers incur comparable costs for building capacities, they will not engage in price competition. When price plays a significant role and the capacity costs at the service providers sufficiently differ, they will adopt substitutable competition instruments: the lower cost service provider will build a faster service and the higher cost service provider will charge a lower price. Comparing our results to those in the existing literature, we find that the service providers invest in lower service rates, engage in less intense price competition, and earn higher profits, while customers wait in line longer when they are unable to infer service rates and are naive in service selection than when they can infer service rates to make sophisticated choices. The customers jockeying behavior further lowers the service providers capacity investment and lengthens the customers duration of stay

Competition and Contracting in Service Industries

Two very different contractual structures are commonly observed in service industries with congestion effects: service level guarantees (SLGs) and best effort (BE) service. We analyze the impact of these contractual agreements on market outcomes in oligopolistic industries. First, we consider a model where firms compete by setting prices and SLGs simultaneously. The SLG is a contractual obligation on the part of the service provider: regardless of how many customers subscribe, the firm is responsible for investing so that the congestion experienced by all subscribers is equal to the SLG. We then consider the BE contractual model where firms compete by setting prices and investment levels simultaneously. With BE contractual agreements, firms provide the best possible service given their infrastructure, but without an explicit guarantee. Using the Nash equilibria (NE) of the games played by firms, we compare these competitive models in terms of the resulting prices, service levels, firms' profits, and consumers' surplus. We first show that the SLG game can be reduced to a standard pricing game, greatly simplifying the analysis of this otherwise complex competitive scenario. We then compare the SLG game with the BE game; equilibria for the BE is characterized in a previous paper. Using these results we show that in the case of constant returns to investment, while the NE price for the SLG game is perfectly competitive, firms obtain positive markups in the unique NE for the BE game. We also study the firms' choice of the strategy space, i.e., whether to offer SLG or BE contracts to the consumer, and find that competition is intensified if even one firm chooses to offer SLG contracts. Our results contribute to the basic understanding of competition and contracting in service industries and yield insight into business and policy considerations

Protection and trade in services : a survey

Until recently, trade in services was mostly ignored by iinternational economists, reflecting a perception that services were nontradable. This has never been true. Transportation and travel, for example, have always been important economic activities. In 1995, services trade climbed to a 20-percent share of global trade -no doubt an underestimate, as the most dynamic component of trade in services is telecommunications, which is not being properly captured in conventional balance of payment statistics. The authors survey the literature on trade in services, focusing on thepolicies used to restrict such trade, the gains from liberalization, and the institutional mechanisms adopted in pursuit of liberalization. They argue that technological progress (which makes services more tradable) and iinternational trade negotiations are likely to keep liberalization of trade in services a high-profile policy issue. They suggest that research focus on developing better estimates of the welfare costs of protectionism in the service sector. This will require quantifying barriers to the international exchange of services.Environmental Economics&Policies,Health Economics&Finance,Payment Systems&Infrastructure,Economic Theory&Research,Decentralization,Health Economics&Finance,ICT Policy and Strategies,Knowledge Economy,Environmental Economics&Policies,Economic Theory&Research