Bounded Rationality in Service Systems
Forthcoming, Manufacturing & Service Operations Management
23 Pages Posted: 8 Oct 2010 Last revised: 25 Dec 2012
Date Written: Septermber 1, 2012
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 prot-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 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.
Keywords: Behavioral operations, bounded rationality, customer behavior, queueing systems, service operations, social welfare
JEL Classification: A12
Suggested Citation: Suggested Citation
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