Analysis of price competition in two-tier service systems

Abstract

This article focuses on the issue of price competition of two private service providers (SPs) in a market with a free public SP. The two private SPs, differentiated by service quality and capacity, choose the optimal prices to maximise their own profits. It has been shown that such a price competition between the private SPs in a market with a public SP reaches a pure Nash equilibrium. Such a system with both private and public SPs is called a two-tier service system. We investigate the impact on the social welfare of the two-tier service system of the competition and collaboration between the two private SPs. In addition, we also examine the impact of the public SP’s competitive advantage on customer service and the private SP’s pricing strategies and their performance. Numerical examples are presented to generate managerial insights for practitioners.

Keywords:

• Two-tier service system
• price competition
• Nash equilibrium
• Nash bargaining model
• social welfare

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Acknowledgements

This research was supported by NSFC under Grants No.71320107004. The corresponding author acknowledges the financial support from the Natural Sciences and Engineering Research Council of Canada (Grant RGPIN197319).

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

The second author acknowledges the financial support to this project by Natural Sciences and Engineering Research Council of Canada [grant number RGPIN197319].