Price and capacity decisions of service systems with boundedly rational customers. (17th November 2017)

• Record Type: Journal Article
• Authors: Li, Xin; Guo, Pengfei; Lian, Zhaotong
• Is Part Of: Naval research logistics. Volume 64:Number 6(2017)
• Page Start: 437
• Page End: 452
• Publication Date: 2017-11-17
• Subjects: bounded rationality -- queueing strategy -- service sustainability; Logistics, Naval -- Periodicals; Supplies and stores -- Periodicals; 359.07
• DOI: 10.1002/nav.21767
• Languages: English
• ISSNs: 0894-069X

Abstract

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.