Automation, Inconvenience and Compensation: A Dynamic View on Service Productivity

The authors extend the seminal article by Rust and Huang (2012) by developing a dynamic simulation model that includes customer inconvenience during a service company’s transition from labor to automation. The proposed framework can be used to determine the company’s optimal level of automation and selling price of the service as well as the speed at which labor should be substituted and the price should be adjusted. our findings include the following. Gradual rather than instant substitution is more profitable if customers need time to adjust to the automation, even if automation itself is cost efficient. The company would not automate enough if it does not optimize the degree of automation and the selling price jointly. Automation can be used to increase demand in a price elastic market, even though demand may drop temporarily.