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Service systems with experience-based anecdotal reasoning customers

Huang, T; Chen, YJ; (2015) Service systems with experience-based anecdotal reasoning customers. In: (pp. pp. 778-790).

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Abstract

© 2014 Production and Operations Management Society. The existing queueing literature typically assumes that customers either perfectly know the expected waiting time or are able to form rational expectations about it. In contrast, in this article, we study canonical service models where customers do not have such full information or capability. We assume that customers lack full capability or ample opportunities to perfectly infer the service rate or estimate the expected waiting time, and thus can only rely on past experiences and anecdotal reasoning to make their joining decisions. We fully characterize the steady-state equilibrium in this service system. Compared with the fully rational benchmark, we find that customers with anecdotal reasoning are less price-sensitive. Consequently, with a higher market potential (higher arrival rate), a revenue-maximizing firm may increase the price if the service rate is exogenous, and it may decrease the price if the service rate is at the firm's discretion. Both results go against the commonly accepted pricing recommendations in the fully rational benchmark. We also show that revenue maximization and welfare maximization lead to fundamentally different pricing strategies with anecdotal reasoning, whereas they are equivalent in the fully rational benchmark.

Type: Proceedings paper
Title: Service systems with experience-based anecdotal reasoning customers
DOI: 10.1111/poms.12298
URI: http://discovery.ucl.ac.uk/id/eprint/1348117
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