Do You Want to Bet? New Service Operations Business Models Leveraging Consumers' Present-Biased Preferences

Posted: 26 May 2017

See all articles by Hsing Kenneth Cheng

Hsing Kenneth Cheng

University of Florida - Warrington College of Business

Liangfei Qiu

University of Florida - Warrington College of Business Administration

Yu-Chen Ben Yang

National Sun Yat-sen University - College of Management

Date Written: May 25, 2017

Abstract

Humans tend to make time-inconsistent intertemporal choices and exhibit naivete about their self-control in the future, a human tendency identified and confirmed in behavioral economics and marketing literature as “present-biased preferences”. New service operations business models betting on this human tendency have been proliferating recently. Of critical interest is whether these new service operations business models generate a higher profit than the traditional retailer model? Our research shows that consumers’ valuation of the underlying product or service, how naïve consumers are in believing meeting the requirement in the future (i.e., their present-biased preferences), and how differently consumers treat losses versus gains (i.e., the loss aversion effect) are three key factors affecting the profitability of these new service operations models. More specifically, we find that when consumers’ valuation of the service is relatively low, the new service operation models outperform the traditional retailer model in terms of merchant’s profits. However, the traditional retailer model performs better when consumers’ valuation is high. We also characterize conditions under which the merchant’s optimal choice of the business model deviates from the social optimum.

Keywords: Service Operations Business Models, Present-Biased Preferences, Loss Aversion, Behavioral Economics

Suggested Citation

Cheng, Hsing Kenneth and Qiu, Liangfei and Yang, Yu-Chen Benjamin, Do You Want to Bet? New Service Operations Business Models Leveraging Consumers' Present-Biased Preferences (May 25, 2017). Available at SSRN: https://ssrn.com/abstract=2973722

Hsing Kenneth Cheng (Contact Author)

University of Florida - Warrington College of Business ( email )

P.O. Box 117169
Gainesville, FL 32611-7169
United States
352-392-7068 (Phone)
352-392-5438 (Fax)

Liangfei Qiu

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/qiuliangfei/

Yu-Chen Benjamin Yang

National Sun Yat-sen University - College of Management ( email )

No. 70, Lienhai Rd.
Kaohsiung, 80424
Taiwan

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