Mass and Niche Service Competition With Heterogeneous Customers and Waiting Line

ABSTRACT We consider a duopoly service market with a mass service provider (SP) and a niche service provider (SP). Customers receive a deterministic reward from the mass service provided by SP. However, customers have different tastes on the niche service provided by SP. We explore four scenarios based on the SPs' ownership, namely, both are public, both are private, SP is public while SP is private (named scenario MS), and SP is private while SP is public (named scenario NS). The public SP aims for welfare maximization, whereas the private SP is profit seeking. We compare these scenarios and find 1) the social welfare obtained with two public SPs is equivalent to the maximal social welfare achieved by a centralized system, and the welfare obtained with two private SPs is smallest; 2) when the market size exceeds a certain threshold, scenario NS can achieve the centralized maximal social welfare; 3) when the market size is below this threshold, both scenario MS and NS can achieve the centralized maximal social welfare, and customer welfare in scenario MS is higher than that in scenario NS. These findings provide insightful guidance to policy makers on which types of service to be opened to private firms in public sectors: in a large‐size market, the mass service can be provided by the private firms; otherwise, both types of services can be opened to the private firms as long as one of them is public.