212 / 2024-04-23 11:45:05

Behavior-Based Pricing and Delay Commitment in Congestion-Prone Systems

behavior-based pricing,expected delay,game theory,service systems,operations-marketing interface

Problem definition: Recent years have witnessed the widespread use of data to recognize repeat and new consumers to offer them different prices, i.e., behavior-based pricing (BBP). While extensive research has explored the market impacts of BBP, most studies overlook the consequential congestion effect due to increased demand. This study fills this gap by investigating BBP's effects in congestion-prone systems, with a particular focus on how delay commitment influences both firms and consumers. Methodology/results: Employing a two-period game-theoretic duopoly model integrated with a queueing system, where service qualities are dynamically adjusted for each period, our analysis consistently reveals that BBP tends to intensify firm competition while concurrently benefiting the consumer population. To restore the efficacy of BBP, we propose a two-period delay commitment strategy. Our findings indicate that, under the framework of delay commitment, BBP can alleviate service competition, reversing its impact on consumers while enhancing firm payoffs. Moreover, when there is valuation asymmetry between firms, it often results in the higher-value firm committing to superior service quality, reminiscent of the Matthew effect. Contrary to popular belief that BBP always lowers social welfare due to inefficient consumer switching in the second period, our research unexpectedly finds that BBP can enhance overall social welfare in congestion-prone systems through its load-balancing effect. Managerial implications: In service systems with endogenous delay decisions, our research highlights the potential drawbacks of BBP for firms. However, adopting a delay commitment strategy can effectively restore BBP's efficiency.