Signaling Quality Via Queues

40 Pages Posted: 7 Apr 2010

See all articles by Laurens Debo

Laurens Debo

Dartmouth College - Tuck School of Business

Christine A. Parlour

University of California, Berkeley - Finance Group

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Date Written: April 7, 2010

Abstract

We consider a firm’s choice of service rate in the following environment. The firm may have high or low quality, and sells a good to consumers who are heterogeneously informed. Consumers arrive according to a Poisson process and are serviced in a random period of time. If a consumer arrives when another consumer is being serviced, he must join a queue. Consumers observe the length of the queue before making their purchasing decision. The firm may choose a fast or slow service rate. A faster rate requires a costly investment in technology. We show that, in equilibrium, informed consumers join the queue if it is below a threshold. The threshold varies with the quality of the good, so an uninformed consumer updates her belief about quality on observing the length of the queue. The strategy of an uninformed consumer has a “hole.” She joins the queue at lengths both below and above the hole, but not at the hole itself. When all consumers are informed, the high-quality firm has a greater incentive to speed up than the low-quality firm. However, the high-quality firm selects a slower service rate than the low-quality firm if there are a lot of queue lengths between the hole in an uninformed consumer’s strategy and the threshold at which informed consumers balk from its queue. Strikingly, if the proportion of informed consumers is low, the high-quality firm may choose the slow service rate even if the technological cost of speeding up is zero. The queue can therefore be a valuable signaling device for a high-quality firm.

Keywords: Queuing Game, Quality Signaling, Service Rate Selection

JEL Classification: M11, C72, D71, D83

Suggested Citation

Debo, Laurens and Parlour, Christine A. and Rajan, Uday, Signaling Quality Via Queues (April 7, 2010). Chicago Booth Research Paper No. 10-18. Available at SSRN: https://ssrn.com/abstract=1585930 or http://dx.doi.org/10.2139/ssrn.1585930

Laurens Debo (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Christine A. Parlour

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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