Price and capacity decisions of service systems with boundedly rational customers |
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| Authors: | Xin Li Pengfei Guo Zhaotong Lian |
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| Affiliation: | 1. Department of Decision Sciences, School of Business, Macau University of Science and Technology, Macau, China;2. Faculty of Business, Hong Kong Polytechnic University, Hung Hom, Hong Kong;3. Faculty of Business Administration, University of Macau, Macau, China |
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| Abstract: | We consider price and capacity decisions for a profit‐maximizing service provider in a single server queueing system, in which customers are boundedly rational and decide whether to join the service according to a multinomial logit model. We find two potential price‐capacity pair solutions for the first‐order condition of the profit‐maximizing problem. Profit is maximized at the solution with a larger capacity, but minimized at the smaller one. We then consider a dynamically adjusting capacity system to mimic a real‐life situation and find that the maximum can be reached only when the initial service rate is larger than a certain threshold; otherwise, the system capacity and demand shrink to zero. We also find that a higher level of customers’ bounded rationality does not necessarily benefit a firm, nor does it necessarily allow service to be sustained. We extend our analysis to a setting in which customers’ bounded rationality level is related to historical demand and find that such a setting makes service easier to sustain. Finally we find that bounded rationality always harms social welfare. |
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| Keywords: | bounded rationality queueing strategy service sustainability |
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