| This dissertation investigates a dynamic model of firm behavior in which firms invest in capacity that is used to provide a good or service to their customers. This capacity choice is assumed to directly influence the level of service that customers experience. Experienced service level, in turn, is assumed to influence both the revenues collected by the firm in the near term and the demand that the firm can expect to see in the future. The linkages that we model allow us to think explicitly about the near-term and long-term effects of service quality. Further, our analysis allows us to analyze such nebulous concepts as the "lost goodwill" costs of service failures by explicitly capturing the future effects of current period decisions.;Throughout this work, we assume that there is a fixed total market of customers whose demands for the good or service are random and who divide their patronage between the firm(s) providing the good or service or opt not to seek service in each period. Periodically, the market shares of the firm(s) can change based on the realized level of customer service provided in the prior period. We assume that the expected level of customer service can be expressed as a function of the (per-customer) capacity of the firms' service delivery systems and that service declines as the capacity decreases. The primary issue we address is the firms' capacity decisions in response to customer service concerns and competitive pressure. We provide conditions under which the firms' optimal (i.e., equilibrium) capacity levels in a period are proportional to the size of their respective customer bases in that period. Further, we develop expressions for the value of a firm's customers and the implicit cost of service failure. This model exhibits a parsimonious formulation and an elegant solution structure. While simple, this model provides interesting managerial insights and yields a number of interesting extensions. |
