Firm Service Rate Selection When Service Rates are Not Observable and Service Value is Unknown to the Market

Abstract:     
We study how a high quality service firm selects a service rate differently than a low quality service firm when the firm cannot communicate its service value or service rate to its customer base. As a result, potential customers may take the queue length upon arrival into account when assessing the service value before joining the queue for service. We show that customer queue joining behavior may not be of the threshold type, which is a typical equilibrium structure under observable service value and rate. Furthermore, we find differentiating equilibria in which the high quality service firm selects a slower service rate than the low quality service firm, even if the cost of speeding up is the same for both firms. We also find that both firm's profit rates under such a differentiating equilibrium may be higher than in equilibria in which both firms select the same service rate. Our research thus provides a rational explanation for often-quoted suspicions that some firms deliberately slow down service to signal quality.

Number of Pages in PDF File: 49

Keywords: Strategic consumer behavior, queueing theory

JEL Classification: M11, C72, D71, D83

working papers series