Customer Inconvenience and Price Compensation

Abstract

Managers are faced with complex decisions when considering automating the front end of a service, where the firm interacts with its customers (e.g., check-in at airports). We develop an analytical model for the optimal decisions as to whether to automate the service and which price to charge. The model accounts for automation-induced customer inconvenience in the short run and differences in service quality and production costs in the long run. We show that it may be optimal not to automate, even if automated service reduces production costs for the firm and is ultimately desired by customers. In other situations, automated service is optimal, even though customer inconvenience may trigger financial losses in the short run. Automated service may also become optimal, as customers become more sensitive to service quality, but only if the quality of the automation technology is sufficiently high. We show that the firm should compensate customers for automation-induced inconvenience, but this price compensation can be reduced as customers become more comfortable with the service. Although automated service is cheaper to produce than labor-produced service, the firm should charge a price premium if the quality of the automated service is sufficiently superior.