Co-opetition in service clusters with waiting-area entertainment

Problem definition: Unoccupied waiting feels longer than it actually is. Service providers operationalize this psychological principle by offering entertainment options in waiting areas. A service cluster with a common space provides firms with an opportunity to cooperate in the investment for providing entertainment options while competing on other service dimensions. Academic/practical relevance: Our paper contributes to the literature by being the first to examine co-opetition in a service setting, in addition to developing a novel model of waiting-area entertainment. It also sheds new light on the emerging practice of service clusters and small-footprint retailing. Methodology: Using a queueing theoretic approach, we develop a parsimonious model of co-opetition in a service cluster with a common space. Results: By comparing the case of co-opetition with two benchmarks (monopoly and duopoly competition), we demonstrate that a service provider that would otherwise be a local monopolist can achieve higher profitability by joining a service cluster and engaging in co-opetition. Achieving such benefits, however, requires a cost-allocation scheme that properly addresses an efficiency-fairness tradeoff—the pursuit of fairness may backfire and lead to even lower profitability than under pure competition. Managerial implications: We show that as much as co-opetition facilitates resource sharing in a service cluster, it heightens price competition. Furthermore, as the intensity of price competition increases, surprisingly, service providers may opt to charge higher service fees, albeit while providing a higher entertainment level. Copyright: © 2019 INFORMS.