Pricing and Strategies in Queuing Perspective Based on Prospect Theory

Due to customers’ heterogeneity, enterprises/service providers usually adopt a service classification for different customers. However, service classification will result in a redistribution of waiting time, reducing wait time for priority customers by increasing wait time for regular customers. In this way, customers will form a psychological utility by comparing the expected waiting time between different queues. In this paper, we study a traditional non-preemptive M/M/1 queuing system in which incorporate customer preferences (loss aversion and gain seeking) will generate a psychological utility, which leads to the switch of customers and further impacts the revenue. In our paper, we analyze the monopoly queuing system in which customers can’t go away freely, and study it from three perspectives: revenue, social welfare, and customer utility. Firstly, we find that from the perspective of revenue maximization, enterprises should choose visual queue for queue classification. Next, enterprises should adopt unobservable queues for service classifications from social welfare maximization. Then, from customer utility maximization, enterprises should cancel service classification and keep regular customers only. Our results not only reaffirm existing research on the benefits of offering differentiated service and pricing by the service providers but also challenge some commonly accepted practices.