Abstract
Competition for service of products between the original equipment manufacturer (OEM) and a fringe firm is studied using a sequential game-theory model. The OEM utilises predictive technology to reduce the product failure rate, and the fringe firm provides efficient service at a reasonable price. Because of market remoteness, the OEM is incapable of matching the local fringe firm’s service quality. The price of service offered by the two firms, the effective failure rate of the product when serviced by the OEM, and the fringe firm’s service quality drive the number of products in the service market. Further, the captive market segment for OEM service and the products’ failure rate as seen by each firm drive that firm’s service demand. In such a setting, the OEM invests in predictive technology that reduces the effective failure rate of the products serviced by it. We find predictive technology benefitting both the firms at higher failure rates, thus acting as a Pareto improvement while implying co-existence in such remote product service markets. We further find the OEM dominating the fringe firm with higher price and profits only when the OEM captive market segment is large.
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