Service Pricing with Loss Averse Customers

39 Pages Posted: 2 Apr 2014 Last revised: 28 Apr 2014

See all articles by Liu Yang

Liu Yang

Tsinghua University - School of Economics & Management

Pengfei Guo

Hong Kong Polytechnic University - Faculty of Business

Yulan Wang

Hong Kong Polytechnic University

Date Written: April 28, 2014

Abstract

We consider a queueing system in which customers are loss averse towards both price and delay attributes: customers compare these two attributes to their rational expectations of the outcomes, with losses being more painful than equal-sized gains being pleasant. We first study customers' equilibrium queueing strategies. We find that, in contrast to the traditional case in which loss aversion is not considered, there could exist three equilibrium strategies, among which one is an evolutionarily stable strategy. We then study the optimal pricing problem for a monopoly server. We show that loss aversion polarizes queues, making long queues even longer and short queues even shorter. Furthermore, loss aversion towards the delay attribute drives down the optimal price whereas loss aversion towards the price attribute pushes up the optimal price. We also find that profit- and welfare-maximizing prices are not the same in a monopoly market. Finally we consider pricing competition in a duopoly market. We find that (1) in a symmetric duopoly setting, loss aversion can push up the equilibrium price; (2) in an asymmetric duopoly setting, the market share of the server with a higher service rate is larger than that in the traditional setting when loss aversion is not considered.

Keywords: service pricing, loss-averse customers, strategic queueing behavior, service competition

Suggested Citation

Yang, Liu and Guo, Pengfei and Wang, Yulan, Service Pricing with Loss Averse Customers (April 28, 2014). Available at SSRN: https://ssrn.com/abstract=2418303 or http://dx.doi.org/10.2139/ssrn.2418303

Liu Yang (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Pengfei Guo

Hong Kong Polytechnic University - Faculty of Business ( email )

Hong Kong

Yulan Wang

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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