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Price and capacity decisions of service systems with boundedly rational customers
Li,Xin1; Guo,Pengfei2; Lian,Zhaotong3
Source PublicationNaval Research Logistics

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.

KeywordBounded Rationality Queueing Strategy Service Sustainability
URLView the original
Indexed BySCI ; SSCI
WOS Research AreaOperations Research & Management Science
WOS SubjectOperations Research & Management Science
WOS IDWOS:000418164800001
PublisherWILEY, 111 RIVER ST, HOBOKEN 07030-5774, NJ USA
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Cited Times [WOS]:1   [WOS Record]     [Related Records in WOS]
Document TypeJournal article
Corresponding AuthorLian,Zhaotong
Affiliation1.Department of Decision Sciences,School of Business,Macau University of Science and Technology,,Macao
2.Faculty of Business,Hong Kong Polytechnic University,,Hung Hom,Hong Kong
3.Faculty of Business Administration,University of Macau,,Macao
Corresponding Author AffilicationFaculty of Business Administration
Recommended Citation
GB/T 7714
Li,Xin,Guo,Pengfei,Lian,Zhaotong. Price and capacity decisions of service systems with boundedly rational customers[J]. Naval Research Logistics,2017,64(6):437-452.
APA Li,Xin,Guo,Pengfei,&Lian,Zhaotong.(2017).Price and capacity decisions of service systems with boundedly rational customers.Naval Research Logistics,64(6),437-452.
MLA Li,Xin,et al."Price and capacity decisions of service systems with boundedly rational customers".Naval Research Logistics 64.6(2017):437-452.
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