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A study of service systems with boundedly rational customers

English Abstract

In this study, we study bounded rationality in service systems. We assume that customers exhibit bounded rationality and choose one service provider over another according to a multinomial logit model. For its part, the service provider needs to decide on price and service rate. We find two interior solutions for the service provider: the large-scale solution is the optimal decision, whereas the small-scale solution determines whether this service can be operated in the long run. Based on the result, we also analyze the effects of bounded rationality on the customers and on the service provider. We then focus on customer-intensive services, wherein a trade-off exists in deciding the service rate for customer-intensive services: a long service time increases service quality as perceived by customers; however, it slows down the service rate and increases customer waiting cost. We study the service rate decision of a service provider in both a monopoly market and an oligopoly market with N competing service providers. We demonstrate that the profit function of a service provider involves a unimodal decision variable (that is, the service rate). We also show that the equilibrium for the servicerate competition game is unique and stable. We then conduct a sensitivity analysis on the effects of the degree of customer rationality and the number of service providers on service rate decision, market share of the firms, and customer surplus. Finally, we examine and compare the revenue-maximizing and welfare-maximizing prices for the system. We determine that the comparison result depends on three factors, namely, market size, service customer intensity, and customer rationality.

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Li, Xin


Faculty of Business Administration




Queuing theory

Service industries -- Management

Customer services


Lian, Zhao Tong

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