Managing Service Systems with Unknown Quality and Customer Anecdotal Reasoning

Production and Operations Management, 27, 1038-1051, doi: 10.1111/poms.12850

25 Pages Posted: 11 Oct 2017 Last revised: 31 Jul 2020

See all articles by Hang Ren

Hang Ren

University College London - School of Management

Tingliang Huang

Haslam College of Business, University of Tennessee; University College London

Kenan Arifoglu

UCL School of Management, University College London

Date Written: July 20, 2016

Abstract

We consider service systems where customers do not know the distribution of uncertain service quality and cannot estimate it fully rationally. Instead, they form their beliefs by taking the average of several anecdotes, the size of which measures their level of bounded rationality. We characterize the customers’ joining behavior and the service provider’s pricing, quality control, and information disclosure decisions. Bounded rationality induces customers to form different estimates of the service quality and leads the service provider to use pricing as a market segmentation tool, which is radically different from the full rationality setting. As customers gather more anecdotes, the service provider may first decrease and then increase price, and the revenue is U-shaped. Interestingly, a larger sample size may harm consumer surplus, although it always benefits social welfare. When the service provider also has control over quality, we find that it may reduce both quality and price as customers gather more anecdotes. In addition, a high-quality service provider may not disclose quality information if the sample size is small, while a low-quality service provider may disclose if the sample size is large. Furthermore, as the expected waiting cost increases, information non-disclosure is more attractive, thereby highlighting the importance of incorporating customer bounded rationality in congested settings.

Suggested Citation

Ren, Hang and Huang, Tingliang and Arifoglu, Kenan, Managing Service Systems with Unknown Quality and Customer Anecdotal Reasoning (July 20, 2016). Production and Operations Management, 27, 1038-1051, doi: 10.1111/poms.12850, Available at SSRN: https://ssrn.com/abstract=3050560 or http://dx.doi.org/10.2139/ssrn.3050560

Hang Ren

University College London - School of Management ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Tingliang Huang (Contact Author)

Haslam College of Business, University of Tennessee ( email )

Haslam College of Business
Stokely Management Center
Knoxville, TN 37000
United States

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Kenan Arifoglu

UCL School of Management, University College London ( email )

Level 38
One Canada Square
London, England E14 5AB
United Kingdom

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