Cyclic Pricing When Customers Queue with Rating Information

Abstract

Consider a situation where a service provider serves two types of customers, sophisticated and naive. Sophisticated customers are well‐informed of service‐related information and make their joining‐or‐balking decisions strategically, whereas naive customers do not have such information and rely on online rating information to make such decisions. We demonstrate that under certain conditions a service provider can increase its profitability by simply “dancing” its price, that is, replacing the static pricing strategy with a high‐low cyclic pricing strategy. The success of this strategy relies on two key conditions: the potential market size is large enough so that congestion is a key concern in the service system, and the rating provides the average price and average utility information. Finally, we show that the cyclic pricing strategy is not socially optimal.