Impact of capacity flexibility on service product line design

With the prevalence of the gig economy, temporary and flexible jobs are commonplace, which offers the option of flexible capacity to firms. With capacity flexibility, firms could utilize the flexible service resource after demand realization. Although capacity flexibility has its advantages of mitigating demand uncertainty, firms may endure productivity inefficiency caused by temporary works or an imperfect match. This paper considers both factors and analyzes the impact of capacity flexibility on a monopoly's capacity investment strategy, product-line design, consumer surplus and social welfare. We show that the capacity investment strategy could be categorized as No Flexibility, Pure Flexibility and Mixed Flexibility according to the relative efficiency and the unit cost of flexible resources. An interesting finding is that with flexible capacity, the service levels to both high-valuation and low-valuation consumers will be higher when the flexible resource is cost-wise efficient compared to the inflexible resource. Otherwise, the customer discrimination will increase with the service level to high-valuation consumers being higher and that to low-valuation consumers being lower. Furthermore, with flexible capacity, the consumer surplus and social welfare will increase only when the flexible resource is cost-wise efficient.

Automated summary

This paper analyzes the impact of capacity flexibility on a monopoly's capacity investment strategy, product-line design, consumer surplus, and social welfare. It shows that the capacity investment strategy can be categorized based on the efficiency and cost of flexible resources. The study finds that flexible capacity can lead to higher service levels for high-valuation consumers when the flexible resource is cost-efficient, but customer discrimination may increase if the flexible resource is not cost-efficient. Additionally, consumer surplus and social welfare only increase when the flexible resource is cost-efficient.