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

The Impact of “Rollover” Contracts on Switching Costs in the UK Voice Market : Evidence from Disaggregate Customer Billing Data

In February 2008, British Telecommunications (BT) introduced automatically renewing, or “rollover”, contracts into the UK market for fixed-voice telephone service. These contracts included a 12-month Minimum Contract Period (MCP) with associated Early Termination Charges (ETCs). Unless customers opted out, at the end of the 12 months they would automatically be rolled over into a new MCP and face new ETCs if they later wished to leave BT. Using a unique, disaggregate, customer billing dataset, we measure the impact of rollover contracts on BT customers’ decision to switch to another provider. We find that, controlling for the effects of tenure, broadband purchase, price discounts, and self-selection, rollover households switch after their first MCP 34.8% (54.8%) less than comparable customers on standard plans (fixed-term contracts). These imply rollover contracts induce switching costs on the order of 33.0% of the monthly price of the average BT fixed-voice telephone service. This raises significant concerns about the competitive effects of such contracts n media and telecommunications markets.

A Survey on the Economics of Behaviour-Based Price Discrimination

Economists have long been interested in understanding the profit, consumer surplus and welfare effects of an ancient marketing strategy: Price Discrimination. While it is not new that firms try frequently to segment customers in order to price discriminate, what has dramatically changed, with recent advances in information technologies, is the quality of consumer-specific data now available in many markets and how this information has been used by firms for price discrimination purposes. Specifically, thanks to information technology it is nowadays increasingly feasible for sellers to segment customers on the basis of their purchasing histories and to price discriminate accordingly. This form of price discrimination has been named in the literature as Behaviour-Based Price Discrimination (BBPD). For a long time economists have been concerned in understanding the economic effects of price discrimination in monopolistic markets. However, because imperfect competition is undoubtedly the most common economic setting, recent research on the field has been concerned with the following issues. Firstly, how are profit, consumer surplus and welfare affected when firms practice some form of price discrimination in imperfectly competitive markets? Secondly, in which circumstances may competitive firms have an incentive to price discriminate or rather to avoid it? As we will see, conclusions regarding the profit and welfare effects of price discrimination are strongly dependent upon the form of price discrimination, which in turn depends upon the form of consumer heterogeneity and the different instruments available for price discrimination. Basically, the aim of this survey is to clarify the two aforementioned issues in imperfectly competitive markets.

Static Pricing Problems under Mixed Multinomial Logit Demand

Price differentiation is a common strategy for many transport operators. In this paper, we study a static multiproduct price optimization problem with demand given by a continuous mixed multinomial logit model. To solve this new problem, we design an efficient iterative optimization algorithm that asymptotically converges to the optimal solution. To this end, a linear optimization (LO) problem is formulated, based on the trust-region approach, to find a "good" feasible solution and approximate the problem from below. Another LO problem is designed using piecewise linear relaxations to approximate the optimization problem from above. Then, we develop a new branching method to tighten the optimality gap. Numerical experiments show the effectiveness of our method on a published, non-trivial, parking choice model

The Role of the Mangement Sciences in Research on Personalization

We present a review of research studies that deal with personalization. We synthesize current knowledge about these areas, and identify issues that we envision will be of interest to researchers working in the management sciences. We take an interdisciplinary approach that spans the areas of economics, marketing, information technology, and operations. We present an overarching framework for personalization that allows us to identify key players in the personalization process, as well as, the key stages of personalization. The framework enables us to examine the strategic role of personalization in the interactions between a firm and other key players in the firm's value system. We review extant literature in the strategic behavior of firms, and discuss opportunities for analytical and empirical research in this regard. Next, we examine how a firm can learn a customer's preferences, which is one of the key components of the personalization process. We use a utility-based approach to formalize such preference functions, and to understand how these preference functions could be learnt based on a customer's interactions with a firm. We identify well-established techniques in management sciences that can be gainfully employed in future research on personalization.CRM, Persoanlization, Marketing, e-commerce,

Harmful Freedom of Choice: Lessons from the Cellphone Market

This article focuses on the relationship between provider and customer, specifically on the complexity of available contracts in the cellphone market and the ways this complexity might be harmful to consumers. This article aims to elucidate the issues, fleshing them out both as a general phenomenon and as a specific implementation in the cellphone context. The aim is not to provide ultimate solutions, but to show the directions these solutions might take and the difficulties involved

Two at the Top: Quality Differentiation in Markets with Switching Costs

We explore the effects of switching costs on the subgame perfect quality decisions of oligopolists with repeated price competition. We establish a strong strategic quality premium. We show that competition for the establishment of customer relationships will eliminate low-quality firms in period 1 and that low-quality firms can survive only based on poaching profits. The equilibrium configuration is characterized by an agglomeration of two providers of top-quality as soon as switching cost heterogeneity is sufficiently significant. We demonstrate a finiteness property, according to which the two top-quality firms dominate the market with a joint market share exceeding 50 %.quality choice; switching costs; poaching; natural oligopoly