Impact of customer bounded rationality on on-demand service platforms

Abstract

We consider an on-demand platform connecting independent agents and delay-sensitive boundedly rational customers. By adopting a queueing-game framework, we analyze the equilibrium joining behaviors of customers and agents, the platform’s optimal pricing strategy, and the resulting profit and social welfare. Moreover, we investigate how the bounded rationality level affects these results. We obtain the following main insights. First, when customers are irrational, the positive externality between the agents and the customers becomes weak. In other words, increasing the same number of agents attracts fewer boundedly rational customers than fully rational ones. Second, we distinguish two types of equilibria in terms of agent participation: one in which all or none of the agents participate and the other in which it is possible that a fraction of the agents may participate. We show that in the latter case, a social planner and a platform can easily align their goals since they are affected by the bounded rationality in the same direction. We attribute the insight to the interactions among the cross-side effect, bounded rationality, and the pooling effect embedded in a queueing system. Next, we characterize the platform’s optimal pricing decisions and prove that the increase in the bounded rationality level does not always lead to higher optimal prices and wages. Finally, we examine the agent side bounded rationality and the social welfare maximizing decisions in the extended models.