A Note On The Strategic Use of Service

Abstract

We develop a model of optimal service provision and pricing in which the level
of service is not viewed as a capacity choice. We study the provision of services
in both a non-strategic setting, characterized by a monopoly, and in a strategic
setting, a differentiated price duopoly. We find that in both settings increased
services lead to increased prices. However, unlike other models, the strategic
setting results in greater services than the non-strategic case. Additionally, we
discuss the welfare effects for consumers and find that any gains in consumer
surplus from increased service provision in the strategic setting are more than
offset by the associated higher equilibrium prices.