Bounded Rationality in Service Systems

Bounded Rationality in Service Systems

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Article ID: iaor20132392
Volume: 15
Issue: 2
Start Page Number: 263
End Page Number: 279
Publication Date: Mar 2013
Journal: Manufacturing & Service Operations Management
Authors: , ,
Keywords: queues: theory, economics
Abstract:

The traditional operations management and queueing literature typically assumes that customers are fully rational. In contrast, in this paper we study canonical service models with boundedly rational customers. We capture bounded rationality using a model in which customers are incapable of accurately estimating their expected waiting time. We investigate the impact of bounded rationality from both a profit‐maximizing firm's perspective and a social planner's perspective. For visible queues with the optimal price, bounded rationality results in revenue and welfare loss; with a fixed price, bounded rationality can lead to strict social welfare improvement. For invisible queues, bounded rationality benefits the firm when its level is sufficiently high. Ignoring bounded rationality, when present yet small, can result in significant revenue and welfare loss.

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