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Vol. 55, No. 4, April 2009, pp. 619–634 issn 0025-1909 eissn 1526-5501 09 5504 0619

MANAGEMENT SCIENCE

informs

®

doi 10.1287/mnsc.1080.0946 © 2009 INFORMS

Competition in Service Industries with Segmented Markets
Gad Allon
Kellogg School of Management, Northwestern University, Evanston, Illinois 60208, g-allon@kellogg.northwestern.edu

Awi Federgruen
Columbia Business School, Columbia University, New York, New York 10027, af7@columbia.edu

W

e develop a model for the competitive interactions in service industries where firms cater to multiple customer classes or market segments with the help of shared service facilities or processes so as to exploit pooling benefits. Different customer classes typically have distinct
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We define the waiting time standard offered by a given firm to a given market segment as the maximum expected steady state waiting time in system the firm guarantees. As to the priority

Electronic copy available at: http://ssrn.com/abstract=1946420

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Allon and Federgruen: Competition in Service Industries with Segmented Markets
Management Science 55(4), pp. 619–634, © 2009 INFORMS

discipline, modern call centers or computerized service processes allow for the easy adoption of very general priority schemes, whereas traditional “brick and mortar” service facilities may, for psychological or other reasons, be confined to simple priority rules such as FCFS or absolute priority schemes with an absolute priority ranking among the customer classes. We distinguish between three types of competition: (i) Price competition—here, all waiting time standards are exogenously given and the firms compete on the basis of their prices only; (ii) Waiting time competition—here, all prices are exogenously given and the competition is in terms of waiting time standards; and (iii) Simultaneous competition—all prices and waiting time standards are selected simultaneously. Prices and waiting time standards are

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