Service Pricing When Customers Collude

45 Pages Posted: 7 Nov 2018

See all articles by Chen Jin

Chen Jin

National University of Singapore

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions

Chenguang (Allen) Wu

Hong Kong University of Science and Technology

Date Written: October 29, 2018

Abstract

We model the presence of collusion amongst customers who wait to consume a service. In congested queues, individual customers seek to maximize their own payoff and compete with each other for limited resources. To overcome this disadvantage, some customers may collude as a group to seek and receive better benefits, often in the form of reduced prices for group members. Using a queuing framework, we explicitly characterize a service provider's optimal pricing and priority decisions when serving a market made up by individual customers and collusive customers.

We demonstrate how individual customers may benefit from the presence of colluding groups when a single price is charged for the service. The presence of collusion enables individual customers to "free-ride" and enjoy an increased consumer surplus. Under price discrimination, the service provider prefers to serve individual customers at a higher price, over collusive customers. However, despite the preference for individual customers, the service provider can improve the revenue by better service management, by prioritizing collusive customers and reducing their price benefit. Prioritization of collusive customers can also improve social welfare over the first come, first served (FCFS) policy, by better utilization and increased market coverage.

Keywords: service operation, queuing game, collusion, groups, pricing, priority

Suggested Citation

Jin, Chen and Veeraraghavan, Senthil K. and Wu, Chenguang (Allen), Service Pricing When Customers Collude (October 29, 2018). Available at SSRN: https://ssrn.com/abstract=3274400 or http://dx.doi.org/10.2139/ssrn.3274400

Chen Jin (Contact Author)

National University of Singapore ( email )

13 Computing Drive
Singapore, 117417
Singapore

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://https://oid.wharton.upenn.edu/profile/senthilv/

Chenguang (Allen) Wu

Hong Kong University of Science and Technology ( email )

Room 5559C, Academic Building
HongKong University of Science and Technology
Hong Kong
Hong Kong

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