Timing of service investments for retailers under competition and demand uncertainty

We study how retailers can time their service investments when demand for a product is uncertain and consumers care both about price and service when choosing which retailer to buy from. By “service” we mean activities a retailer can invest in and which can drive traffic into the store. We consider offering extended operating hours as an example of such service and examine the timing of service investments for two competing retailers. Specifically, we analyze two retailers who compete on price and service level, and characterize both the prices and the service levels, as well as the timing of their service investment decisions. Our model also considers two effects of retailer service-the effect on total demand for the product and the effect on a retailer's market share. We show that investing in service before demand realization, although counterintuitive, can be beneficial for competing retailers. On the other hand, a large mismatch between actual and expected demand and a low probability of high demand justifies the postponement of service investments after observing demand. We also show that the incentive to invest in service before demand realization becomes more pronounced when service investments can increase the overall demand for the product in addition to protecting market share. Our findings have important implications for retailers with regards to the timing of their service investment decisions.