Is it Worth the Wait? Service Choice and Externalities When Waiting is Expensive

42 Pages Posted: 28 Jan 2008

See all articles by Senthil K. Veeraraghavan

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions

Laurens Debo

Dartmouth College - Tuck School of Business

Date Written: January 2008

Abstract

We study how rational customers choose between two congested service facilities with finite buffer space and unknown service value when waiting is expensive. Customers observe an imperfect private signal indicating which service facility may provide more service value, as well as the queue lengths at the service facilities before making their choice. If more customers choose the same service facility because of their private information, longer queues will form at the service facility and therefore a long queue may be an indication of higher quality. On the other hand, a long queue also implies more waiting time to obtain the service. We characterize the equilibrium queue-joining behavior of arriving customers in the presence of such positive and negative externalities. We find that when the waiting costs are positive, it might be rational for customers to join the longer queue, even if the private information suggests joining the shorter queue. How the information is distributed among customers, and the buffer sizes play key roles in determining the customer choice behavior: In markets in which all of the customers have the same signal strength, there has to be enough waiting space available allowing for variability in queue length observations to make customers infer high service value from long queues. However, in markets in which customers have different signal strengths, the less informed customers join the longest queue even when there is not much variability in the queue lengths due to limited waiting space. The customers join the longer queue when the arrival rates are low as then the queue length information is the least contaminated by the spillovers due to capacity constraints. Finally, we find that depending on the arrival rate and waiting costs, these externalities provide strong incentives to both service facilities or to either the high-quality or the low-quality service facility to co-locate physically or virtually.

Keywords: Customer Herding Behavior, Waiting Costs, Service Capacity, Spill-over demand, Uncertain Service Value

JEL Classification: D62, D83, D84, M11

Suggested Citation

Veeraraghavan, Senthil K. and Debo, Laurens, Is it Worth the Wait? Service Choice and Externalities When Waiting is Expensive (January 2008). Available at SSRN: https://ssrn.com/abstract=1088027 or http://dx.doi.org/10.2139/ssrn.1088027

Senthil K. Veeraraghavan (Contact Author)

University of Pennsylvania - The Wharton School - Operations, Information and Decisions ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://https://oid.wharton.upenn.edu/profile/senthilv/

Laurens Debo

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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