MANAGING PRICE AND SERVICE RATE IN CUSTOMER-INTENSIVE SERVICES UNDER SOCIAL INTERACTIONS

Abstract

This paper investigates the price and service rate decisions in a customer-intensive service in an M/M/1 queue system under the influence of social interactions, where a higher value of the service is perceived if more customers purchase the service. The customer-intensive nature of the service requires a low service speed to maintain its quality, which may increase the congestion of the system. Two cases where customers are either homogeneous or heterogeneous in terms of the customer intensity are considered. It is found that social interactions can always benefit the service provider as more expected revenue can be achieved, and potential profits would be lost if the influence of social interactions is ignored. For the case with heterogeneous customers, the optimal price and service rate decisions are solved with or without considering social interaction effect. The study finds the proportions of high and low sensitive customers and the social interaction intensity are critical to the operational decisions and the market coverage strategies. These results offer a better understanding on the interplay between the quality-speed conundrum and the influence of social interactions in customers’ purchase behaviour in managing customer-intensive services.