Seminar (Dept. of Management Science and Engineering)

Title: Behavior-Based Pricing in Congestion-Prone Systems

Speaker: Zhongbin Wang (College of Management and Economics (CoME) of Tianjin University)

Time: 10:00 (Wednesday), November 23, 2022

Venue: Online Meeting

Language：Chinese/English

ABSTRACT：

Problem definition: Recent years have witnessed the widely use of data to recognize the repeat and new consumers so as to offer them with different prices, i.e., behavior-based pricing (BBP). Extant research has examined the impacts of BBP on the market, but most of which ignore the congestion effect in serving each consumer. This research extends the literature by investigating the effect of promised delay cost (PDC) on the firms and consumers to reveal the implications of BBP in congestion-prone systems. Methodology/results: We establish a two-period dynamic game-theoretic duopoly embedded with a queueing system, where a PDC that captures the service quality is committed to consumers before the start of sales season. Firms collect consumers' purchase history data in the first period and then conduct a BBP in the second period. We uncover that the heterogeneity of PDCs fundamentally affects the impacts of BBP. First, it indicates that BBP is always detrimental to the firm that provides a higher service quality. Second, contrary to the conventional wisdom that BBP always reduces social welfare because of the inefficient consumer switching in the second period, we reveal that, somewhat surprisingly, the overall social welfare can be improved by using BBP when the difference of PDCs is large. Finally, when the PDC is endogenously determined, we reveal that the practice of BBP lowers the service quality in the long run, but improves the payoffs of both firms. Managerial implications: We show that pay-to-switch strategy is not always favorable for the low-capacity firm, which should shift from pay-to-switch strategy to pay-to-stay strategy as the difference of PDCs increases. Further, BBP should be encouraged by the social planner when the difference of PDCs is large. With endogenous PDC, managers should be more cautious about using BBP when the marginal capacity cost or delay sensitivity is intermediate, where neither party can benefit from it.