Quality-Speed Competition in Customer-Intensive Services with Boundedly Rational Customers

Xin Li, Pengfei Guo, Zhaotong Lian

Research output: Journal article publicationJournal articleAcademic researchpeer-review

27 Citations (Scopus)

Abstract

The customers are boundedly rational and choose their service providers according to a logit model. We demonstrate that the service provider revenue function is unimodal in the service rate, its decision variable, and show that the service rate competition has a unique and stable equilibrium. We then study the price decision under three scenarios with the price determined by a revenue-maximizing firm, a welfare-maximizing social planner, or two servers in competition. We find that the socially optimal price, subject to the requirement that the customer actual utility must be non-negative, is always lower than the competition equilibrium price which, in turn, is lower than the revenue-maximizing monopoly price. However, if the customer actual utility is allowed to be negative in social optimization, the socially optimal price can be higher than the other two prices in a large market.
Original languageEnglish
Pages (from-to)1885-1901
Number of pages17
JournalProduction and Operations Management
Volume25
Issue number11
DOIs
Publication statusPublished - 1 Nov 2016

Keywords

  • bounded rationality
  • customer-intensive service
  • queueing strategy
  • speed-quality competition

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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