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Incentive compatible equilibrian in markets with time competition

Author: Loch, Christoph H. INSEAD Area: Technology and Operations Management Series: Working Paper ; 94/31/TM Publisher: Fontainebleau : INSEAD, 1994.Language: EnglishDescription: 22 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper develops a model with two firms, represented as M/M queues, that compete in a market with N segments of impatient customers, each segment with different waiting cost rates and price sensitivities. If both firms have the same processing capabilities, then the equilibrium will be symmetric on the firm side, i.e., both firms will have the same outputs and prices per customer segment and not choose different market niches. If the firms cannot identify which segment a customer belongs to when he/she joins, then the equilibrium generally breaks down, because customers will have an incentive to cheat and sign up under a wrong "type" in order to get preferential treatment and lower their total cost. The paper constructs an incentive-compatible contract that the firms can offer to the customers in order to re-establish the equilibrium. This is a generalization of the incentive-compatible pricing scheme for an internal sevice facility proposed by Mendelson and Whang (1990)
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This paper develops a model with two firms, represented as M/M queues, that compete in a market with N segments of impatient customers, each segment with different waiting cost rates and price sensitivities. If both firms have the same processing capabilities, then the equilibrium will be symmetric on the firm side, i.e., both firms will have the same outputs and prices per customer segment and not choose different market niches. If the firms cannot identify which segment a customer belongs to when he/she joins, then the equilibrium generally breaks down, because customers will have an incentive to cheat and sign up under a wrong "type" in order to get preferential treatment and lower their total cost. The paper constructs an incentive-compatible contract that the firms can offer to the customers in order to re-establish the equilibrium. This is a generalization of the incentive-compatible pricing scheme for an internal sevice facility proposed by Mendelson and Whang (1990)

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