Bounded Rationality in Service Systems

The traditional operations management and queueing literature typically assumes that customers are fully rational. In contrast, in this paper we study canonical service models with boundedly rational customers. We capture bounded rationality using a model in which customers are incapable of accurately estimating their expected waiting time. We investigate the impact of bounded rationality from both a profit-maximizing firm's perspective and a social planner's perspective. For visible queues with the optimal price, bounded rationality results in revenue and welfare loss; with a fixed price, bounded rationality can lead to strict social welfare improvement. For invisible queues, bounded rationality benefits the firm when its level is sufficiently high. Ignoring bounded rationality, when present yet small, can result in significant revenue and welfare loss.

[1]  Jan A. Van Mieghem,et al.  Price and Service Discrimination in Queueing Systems: Incentive-Compatibility of Gcμ Scheduling , 2000 .

[2]  Lars-Göran Mattsson,et al.  Probabilistic choice and procedurally bounded rationality , 2002, Games Econ. Behav..

[3]  J. Hey,et al.  INVESTIGATING GENERALIZATIONS OF EXPECTED UTILITY THEORY USING EXPERIMENTAL DATA , 1994, Experiments in Economics.

[4]  Vernon N. Hsu,et al.  Optimal Scheduling and Incentive Compatible Pricing for a Service System with Quality of Service Guarantees , 2009, Manuf. Serv. Oper. Manag..

[5]  Uri Yechiali,et al.  On Optimal Balking Rules and Toll Charges in the GI/M/1 Queuing Process , 1971, Oper. Res..

[6]  H. Simon,et al.  A Behavioral Model of Rational Choice , 1955 .

[7]  Bernd H. Schmitt,et al.  Waiting time and decision making: is time like money? , 1995 .

[8]  A. Rubinstein.  Modeling Bounded Rationality , 1998 .

[9]  K. Talluri,et al.  The Theory and Practice of Revenue Management , 2004 .

[10]  A. Tversky,et al.  Advances in prospect theory: Cumulative representation of uncertainty , 1992 .

[11]  R. McKelvey,et al.  Quantal Response Equilibria for Normal Form Games , 1995 .

[12]  D. Stahl,et al.  On Players' Models of Other Players: Theory and Experimental Evidence , 1995 .

[13]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[14]  J. Friedman,et al.  Boundedly Rational Nash Equilibrium: A Probabilistic Choice Approach☆☆☆ , 1997 .

[15]  R. Hogarth.  Judgement and choice: The psychology of decision , 1982 .

[16]  Ernst Fehr,et al.  Chapter 8 The Economics of Fairness, Reciprocity and Altruism – Experimental Evidence and New Theories , 2006 .

[17]  Enno Siemsen,et al.  Demand Forecasting Behavior: System Neglect and Change Detection , 2011, Manag. Sci..

[18]  Darryl A. Seale,et al.  Entry Times in Queues with Endogenous Arrivals: Dynamics of Play on the Individual and Aggregate Levels , 2005 .

[19]  R. Luce,et al.  Individual Choice Behavior: A Theoretical Analysis. , 1960 .

[20]  ZhangJuanjuan,et al.  Designing Pricing Contracts for Boundedly Rational Customers , 2008 .

[21]  Refael Hassin,et al.  To Queue or Not to Queue: Equilibrium Behavior in Queueing Systems , 2002 .

[22]  Lars-Göran Mattsson,et al.  Probabilistic Choice as a Result of Mistakes , 2000 .

[23]  Leonard M. Adleman,et al.  Proof of proposition 3 , 1992 .

[24]  Noah Lim,et al.  Designing Price Contracts for Boundedly Rational Customers: Does the Number of Blocks Matter? , 2007, Marketing Science.

[25]  Dan Ariely,et al.  The End of Rational Economics , 2009 .

[26]  Refael Hassin.  Equilibrium customers’ choice between FCFS and random servers , 2009, Queueing Syst. Theory Appl..

[27]  L. Thurstone.  A law of comparative judgment. , 1994 .

[28]  Juanjuan Zhang,et al.  Designing Pricing Contracts for Boundedly Rational Customers: Does the Framing of the Fixed Fee Matter? , 2008, Manag. Sci..

[29]  R. Selten,et al.  Bounded rationality: The adaptive toolbox , 2000 .

[30]  Jan A. Van Mieghem,et al.  Strategically Seeking Service: How Competition Can Generate Poisson Arrivals , 2004, Manuf. Serv. Oper. Manag..

[31]  Luca Anderlini,et al.  Bounded Rationality and Incomplete Contracts , 2000 .

[32]  Refael Hassin.  Consumer Information in Markets with Random Product Quality: The Case of Queues and Balking , 1986 .

[33]  Elliot Bendoly,et al.  Behavior in operations management: Assessing recent findings and revisiting old assumptions , 2006 .

[34]  L. Blume.  The Statistical Mechanics of Strategic Interaction , 1993 .

[35]  D. Maister.  The Psychology of Waiting Lines , 2005 .

[36]  Constantinos Maglaras,et al.  On Customer Contact Centers with a Call-Back Option: Customer Decisions, Routing Rules, and System Design , 2004, Oper. Res..

[37]  Gad Allon,et al.  Cheap Talk in Operations: Role of Intentional Vagueness , 2009 .

[38]  Suren Basov,et al.  Monopolistic Screening with Boundedly Rational Consumers , 2009 .

[39]  Timothy N. Cason,et al.  Bounded rationality in laboratory bargaining with asymmetric information , 2005 .

[40]  Ming-Deh A. Huang,et al.  Proof of proposition 2 , 1992 .

[41]  L. Ross,et al.  Human Inference: Strategies and Shortcomings of Social Judgment. , 1981 .

[42]  Patrick Bajari,et al.  Auction Models When Bidders Make Small Mistakes: Consequences for Theory and Estimation , 2001 .

[43]  M. Puterman,et al.  Bias optimality in controlled queueing systems , 1998 .

[44]  Xuanming Su,et al.  Bounded Rationality in Newsvendor Models , 2007, Manuf. Serv. Oper. Manag..

[45]  Robert Sugden,et al.  A Microeconometric Test of Alternative Stochastic Theories of Risky Choice , 2002 .

[46]  Gary P. Pisano,et al.  Toward a Theory of Behavioral Operations , 2008, Manuf. Serv. Oper. Manag..

[47]  Erica L. Plambeck,et al.  Implications of Hyperbolic Discounting for Optimal Pricing and Scheduling of Unpleasant Services That Generate Future Benefits , 2013, Manag. Sci..

[48]  M. Haviv.  Strategic Customer Behavior in a Single Server Queue , 2011 .

[49]  Philipp Afèche,et al.  Incentive-Compatible Revenue Management in Queueing Systems: Optimal Strategic Delay , 2013, Manuf. Serv. Oper. Manag..

[50]  Klaus M. Schmidt,et al.  The Economics of Fairness, Reciprocity and Altruism--Experimental Evidence and New Theories. , 2005 .

[51]  Xuanming Su.  Bounded Rationality in Newsvendor Models , 2007 .

[52]  Siddhartha Bhattacharyya,et al.  Single-leader–multiple-follower games with boundedly rational agents , 2009 .

[53]  A. D. Pearman,et al.  Judgment and Decision Making: An Interdisciplinary Reader , 1999 .

[54]  R. Duncan Luce,et al.  Individual Choice Behavior: A Theoretical Analysis , 1979 .

[55]  G. Mallard.  Modelling Cognitively Bounded Rationality: An Evaluative Taxonomy , 2012 .

[56]  Chris D. Orme,et al.  Investigating Generalisations of Expected Utility Theory Using Experimental Data , 1994 .

[57]  P. Naor.  The Regulation of Queue Size by Levying Tolls , 1969 .

[58]  Constantinos Maglaras,et al.  Decision , Risk and Operations Working Papers Series Contact Centers with a CallBack Option and Real-Time Delay Information , 2004 .

[59]  Richard C. Larson,et al.  OR Forum - Perspectives on Queues: Social Justice and the Psychology of Queueing , 1987, Oper. Res..

[60]  Saralees Nadarajah,et al.  Linear combination of Gumbel random variables , 2007 .

[61]  A. M. Davis.  An Experimental Investigation of Pull Contracts in Supply Chains , 2015 .

[62]  J. Conlisk.  Conlisk : Why Bounded Rationality ? 671 , 2000 .

[63]  Josef Hofbauer,et al.  Evolution in games with randomly disturbed payoffs , 2007, J. Econ. Theory.

[64]  Shaler Stidham,et al.  Individual versus Social Optimization in Exponential Congestion Systems , 1977, Oper. Res..

[65]  Niels Chr. Knudsen.  Individual and Social Optimization in a Multiserver Queue with a General Cost-Benefit Structure , 1972 .

[66]  Amnon Rapoport,et al.  Joining a Queue or Staying Out: Effects of Information Structure and Service Time on Arrival and Staying Out Decisions , 2005 .

[67]  Kenneth L. Schultz,et al.  Bodies of Knowledge for Research in Behavioral Operations , 2009 .

[68]  H. Simon,et al.  Models of Man. , 1957 .

[69]  Eric J. Johnson,et al.  Behavioral decision research: A constructive processing perspective. , 1992 .

[70]  M. Burd,et al.  Can irrational behaviour maximise fitness? , 2008, Behavioral Ecology and Sociobiology.

[71]  Amnon Rapoport,et al.  Equilibrium Play in Single-Server Queues with Endogenously Determined Arrival Times , 2004 .

[72]  G. Pitz,et al.  Judgment and decision: theory and application. , 1984, Annual review of psychology.

[73]  U. Yechiali.  Customers' Optimal Joining Rules for the GI/M/s Queue , 1972 .

[74]  G. A. Miller,et al.  Book Review Nisbett, R. , & Ross, L.Human inference: Strategies and shortcomings of social judgment.Englewood Cliffs, N.J.: Prentice-Hall, 1980. , 1982 .

[75]  Louis Anthony Cox,et al.  Wiley encyclopedia of operations research and management science , 2011 .

[76]  Bounded Rationality in Service Systems , 2010 .

[77]  Jacob K. Goeree,et al.  Quantal Response Equilibrium and Overbidding in Private-Value Auctions , 2002, J. Econ. Theory.

[78]  D. McFadden.  Conditional logit analysis of qualitative choice behavior , 1972 .

[79]  André de Palma,et al.  Discrete Choice Theory of Product Differentiation , 1995 .