Service Pricing with Loss Averse Customers
39 Pages Posted: 2 Apr 2014 Last revised: 28 Apr 2014
Date Written: April 28, 2014
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
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