Co-opetition in Services with Waiting-Area Entertainment

Abstract

Unoccupied waiting feels longer than it actually is. Service providers recognize this psychological effect and commonly offer entertainment options in waiting areas. To alleviate the cost of offering these entertainment options, many service providers choose to cooperate in this investment while competing against each other on other service dimensions, a practice known as “co-opetition.” In this paper, we develop a parsimonious model of co-opetition in service industries with entertainment options. By comparing the case of co-opetition with two benchmarks (monopoly, and duopoly competition), we demonstrate that a co-opeting service provider can sometimes achieve a profit higher than that in the monopoly setting, especially when the capacity is costly, entertainment options are inexpensive, or customers are highly sensitive to waiting. Our numerical study suggests that on average, the profit under co-opetition can be 7.65% higher than that under monopoly, with a maximum of 77.40%. Such benefits, however, are not guaranteed. We show that as much as coopetition facilitates cost sharing, it also intensifies price competition. In designing the cost-allocation scheme, the pursuit of fairness may backfire and lead to even lower profits than those under duopoly competition. We further show that as the intensity of price competition increases, contrary to what one would expect, both service providers choose to charge higher service fees, albeit while providing higher entertainment levels.