Operational Impact of Service Innovations in Multi-Step Service Systems

Service quality is an important attribute that is used to characterize many service systems. In this study, we examine a service system with two consecutive steps that have shared resources. The service process consists of a base service (first step in the process) followed by a second step that adds additional value. We first look at a social surplus maximizing service provider (SP) who decides the optimal service capacity and re‐optimizes in response to changes in the speed of service of the first step due to local innovations. Our main objective is to explore using simple and stylized models, the effect on the service system of local innovations in step 1 that decrease this step's service times. We find that the effect of such innovations can sometimes lead to the worsening of certain critical service quality measures when SPs are monopolists. Next, using a model of competition, we find that this effect continues to hold in settings where SPs compete for arrivals. Our results have interesting consequences for many service systems and may help explain some of the unintended effects of service innovations reported in the literature.