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Bounded Rationality in Service SystemsTingliang HuangUniversity College London - Department of Management Science and Innovation Gad AllonNorthwestern University - Kellogg School of Management Achal BassambooNorthwestern University - Department of Managerial Economics and Decision Sciences (MEDS) Septermber 1, 2012 Forthcoming, Manufacturing & Service Operations Management Abstract: The traditional operations management 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 model in which customers are incapable of accurately estimating their expected waiting time. We investigate the impact of bounded rationality from both a pro t-maximizing firm and a social planner's perspective. For visible queues with the optimal price, bounded rationality results in revenue and welfare loss; with a fi xed 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 signi ficant revenue and welfare loss.
Number of Pages in PDF File: 23 Keywords: Behavioral operations, bounded rationality, customer behavior, queueing systems, service operations, social welfare JEL Classification: A12 Accepted Paper SeriesDate posted: October 8, 2010 ; Last revised: December 25, 2012Suggested CitationContact Information
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