Competition in Large-Scale Service Systems: Do Waiting Time Standards Matter?

Customers often select service providers by trading three categories of service attributes: prices, service levels as measured by the response time to a service request, and all other intangible attributes. The purpose of this paper is to study the equilibrium behavior in a market with both smalland large-scale service providers that compete on both the price and service-level attributes. We find that, while price-differentiation plays a key role in determining the competition outcomes for both large and small firms, service-level differentiation is of greater importance for the small firms. The large firms will provide high service levels in equilibrium, but might choose to set these according to an industry standard rather than actively differentiate themselves from the competition on this attribute. With additional assumptions on the demand model we are able to identify the Quality-and-Efficiency-Driven regime, which was known to be optimal in many monopolistic settings, as the equilibrium outcome in competition. We are also able to identify in relative precision the equilibrium prices and relate these to the equilibrium in a pure price-competition. To establish these results we introduce a novel framework that combines 2-Nash equilibria and heavy-traffic queueing analysis and apply these to a sequence of replicated markets with growing aggregate demand.