Bounded Rationality in Service Systems

Forthcoming, Manufacturing & Service Operations Management

23 Pages Posted: 8 Oct 2010 Last revised: 25 Dec 2012

See all articles by Tingliang Huang

Tingliang Huang

Carroll School of Management, Boston College; University College London

Gad Allon

University of Pennsylvania - The Wharton School

Achal Bassamboo

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS)

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 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.

Keywords: Behavioral operations, bounded rationality, customer behavior, queueing systems, service operations, social welfare

JEL Classification: A12

Suggested Citation

Huang, Tingliang and Allon, Gad and Bassamboo, Achal, Bounded Rationality in Service Systems (Septermber 1, 2012). Forthcoming, Manufacturing & Service Operations Management, Available at SSRN: https://ssrn.com/abstract=1688307 or http://dx.doi.org/10.2139/ssrn.1688307

Tingliang Huang (Contact Author)

Carroll School of Management, Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467

University College London ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467

Gad Allon

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Achal Bassamboo

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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