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Bounded Rationality in Service Systems, Manufacturing & Service Operations Management (M&SOM)

Abstract

The traditional economics and queueing literature typically assume 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 framework in which better decisions are made more often, while the best decision needs not always be made. We investigate the impact of bounded rationality on social welfare and revenue of a profit maximizing firm when the queue is visible and not visible to the customers. For invisible queues, from the firm perspective, higher bounded rationality always leads to higher optimal prices and higher revenue when customers are sufficiently boundedly rational. From the social planner perspective, there may be strictly positive social welfare losses when customers are sufficiently boundedly rational. For visible queues with a fixed price, we prove that a little bit of bounded rationality can lead to strict social welfare improvement, and we provide a simple inequality under which this improvement happens. With the optimal prices, however, bounded rationality always decreases social welfare, and a little bit of bounded rationality always results in revenue losses. We demonstrate that ignoring bounded rationality may result in significant revenue and social welfare loss.

Type

Article

Author(s)

Tingliang Huang, Gad Allon, Achal Bassamboo

Date Published

2013

Citations

Huang, Tingliang, Gad Allon, and Achal Bassamboo. 2013. Bounded Rationality in Service Systems. Manufacturing & Service Operations Management (M&SOM) .

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