Quality‐Speed Competition in Customer‐Intensive Services with Boundedly Rational Customers

Abstract

We consider a system in which two competing servers provide customer‐intensive services and the service reward is affected by the length of service time. The customers are boundedly rational and choose their service providers according to a logit model. We demonstrate that the service provider revenue function is unimodal in the service rate, its decision variable, and show that the service rate competition has a unique and stable equilibrium. We then study the price decision under three scenarios with the price determined by a revenue‐maximizing firm, a welfare‐maximizing social planner, or two servers in competition. We find that the socially optimal price, subject to the requirement that the customer actual utility must be non‐negative, is always lower than the competition equilibrium price which, in turn, is lower than the revenue‐maximizing monopoly price. However, if the customer actual utility is allowed to be negative in social optimization, the socially optimal price can be higher than the other two prices in a large market.