Price and capacity decisions of service systems with boundedly rational customers

Xin Li, Pengfei Guo, Zhaotong Lian

Research output: Journal article publicationJournal articleAcademic researchpeer-review

3 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)437-452
Number of pages16
JournalNaval Research Logistics
Volume64
Issue number6
DOIs
Publication statusPublished - 1 Sep 2017

Keywords

  • bounded rationality
  • queueing strategy
  • service sustainability

ASJC Scopus subject areas

  • Modelling and Simulation
  • Ocean Engineering
  • Management Science and Operations Research

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