Balancing IT with the human touch: Optimal investment in IT-based customer service

To cut costs, companies have chosen to deliver a variety of service offerings online. However, the digital systems providing such services (e-service) have always been complemented with or supported by humanbased service (h-service). Whereas h-service has total costs that increase with the demand for services, e-service mainly requires a fixed investment upfront, which can be amortized over the totality of customers served. Considering the different nature of the costs of h-service and e-service and the heterogeneity of customer preferences for services, we derive the optimal mix of h-service and e-service for a service-providing company vis-à-vis its competitor. Our theoretical analysis finds the subgame-perfect Nash equilibria that determines the optimal positions in a duopoly setting. We further study the competitive dynamics of the system to examine how firms stay on the equilibrium paths. Using simulation, we investigate the effects of starting positions, small adjustments in h-service and/or e-service, and monotonic expansions of e-service on the final positioning and profits of the firms. Our results demonstrate that when firms follow a local best-reply strategy, they may end up in a position of low profitability, and when only monotonic expansions of e-service are allowed, both firms may end up overinvesting in e-service.