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

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

37 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)1885-1901
Journal / PublicationProduction and Operations Management
Volume25
Issue number11
Online published21 Jun 2016
Publication statusPublished - Nov 2016
Externally publishedYes

Abstract

We consider a system in which two competing servers provide customer-intensive services and the service reward is affected by the length of service time. 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. © 2016 Production and Operations Management Society

Research Area(s)

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