Competition and contracting in service industries

In service industries with congestion effects, two very different contractual structures are commonly observed, depending on whether or not firms choose to offer a guaranteed service level. We analyze the impact of these choices on market outcomes in oligopolistic industries. Our results highlight how different contractual agreements change the intensity of price competition in service industries. Broadly speaking, we show that competition is intensified when firms choose to offer service level guarantees.

► In service industries, firms can offer different contractual agreements.
► Firms can offer a guaranteed service level or a “best effort” contract.
► We show how these different contracts change the intensity of price competition.
► Competition is intensified when firms choose to offer service level guarantees.