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 …show more content…

We first (§5) represent the demand rate faced by a given firm for a given market segment (customer class) as a separable function of all prices and waiting time standards offered to this segment in the industry, which in addition is linear in the price vector. This representation assumes that the customers are completely segmented. Each individual potential customer unambiguously belongs to one of the market segments without being able to switch between segments or to misrepresent his segment identity. In this context, a consumer is defined as an individual service-requiring unit, for instance, an individual box or letter rather than the household or firm that selects the service provider, possibly selecting one provider for its letters and a different one for its parcels. Complete segmentation is possible, for example, on the basis of (i) geographic differentiation (internet and mail delivery services or banking services); (ii) different product features (boxes versus letters, different financial products handled by electronic brokerage firms); (iii) age (senior citizens, children, and others); and (iv) the business sector (education, government, and the commercial sector). In §6, we outline how our model and results can be generalized to settings where customers can select which class they wish to belong to, and the demand