Abstract
This research investigates the effect of reference dependence on waiting times in service systems which formerly used a first-in-first-out (FIFO) service but have introduced a priority line with a fee. Our model combines reference-dependent gain-loss utility with standard customer utility, and we posit that customers are pleased with shorter-than-expected waiting times, whereas longer-than-expected times lead to dissatisfaction and an increased likelihood of balking. The study explores two scenarios: a captive customer system (CCS) and a noncaptive customer system (NCCS), with a focus on optimal pricing and segmentation strategies for revenue and social welfare maximization. The results reveal that, in a CCS, the service provider should implement observed and unobserved customer segmentation to optimize revenue and social welfare, respectively. In an NCCS, the impact of customer segmentation on revenue maximization depends on the value of regular customers, their loss reference-dependent preferences, and the system's offered load. Alternatively, if the service provider seeks to maximize social welfare, the provider's use of customer segmentation relies solely on the system's offered load and customers' reference-dependent preferences. Our findings also indicate that reference dependence can have varying impacts under different conditions, suggesting the effectiveness of tailored service and pricing strategies. Notably, a CCS generates more revenue than does an NCCS because of its captive nature, and, surprisingly, increasing the service rate can decrease revenue while improving social welfare. These insights have significant implications for service management strategies for a CCS and an NCCS.
Recommended Citation
J. Liu et al., "Reference Dependence in Queue Design and Pricing Strategies," Service Science, vol. 16, no. 4, pp. 272 - 296, Institute for Operations Research and Management Sciences, Dec 2024.
The definitive version is available at https://doi.org/10.1287/serv.2023.0033
Department(s)
Electrical and Computer Engineering
Keywords and Phrases
customer segmentation; nonpreemptive M/M/1 service system; psychological impact; reference dependence; revenue and social welfare
International Standard Serial Number (ISSN)
2164-3970; 2164-3962
Document Type
Article - Journal
Document Version
Citation
File Type
text
Language(s)
English
Rights
© 2025 Institute for Operations Research and Management Sciences, All rights reserved.
Publication Date
01 Dec 2024
Comments
National Natural Science Foundation of China, Grant 72071112