Market Heterogeneity and Local Capacity Decisions in Services

We empirically document factors that influence how local operating managers use discretion to balance the trade‐off between service capacity costs and customer sensitivity to service time. Our findings, using data from one of the largest financial services providers in the United States, indicate that customer sensitivity to service time varies widely and predictably with observable market characteristics. In turn, we find evidence that local operating managers account for market‐specific customer sensitivities to service times by deviating frequently and in predictable ways from the recommendations offered by a centralized capacity‐planning model. Finally, we document that these discretionary capacity supply decisions exhibit a strong learning effect whereby experienced operating managers place more weight than their less‐experienced counterparts on the market‐specific trade‐off between service capacity costs and customer sensitivity to service times. Overall, our results demonstrate both the importance of local knowledge as an input in service operations and the potential for incorporating richer data on customer behavior and preferences into service cost and productivity standard metrics.