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Queuing for expert services

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Many services like car repair, medical, legal and consultant services have the characteristic of a credence good: The customers cannot verify, even ex post, whether the amount of prescribed service was appropriate or not. This may create an incentive to provide unnecessary services, that is, the expert may perform extra service that is of no value to the customer, but that allows the expert to increase his revenues. This is called demand inducement. Rational customers process ex ante the incentive of the expert to advise unnecessary service and update their valuation of the service accordingly. A low workload level (an idling expert), combined with a fee per unit of service time, may indicate that the expert has a high incentive to prescribe unnecessary service. On the other hand, a high workload level (a busy expert), or a fixed fee independent of the actual service time may indicate that the expert has little incentive to perform unnecessary service. When the arrival rate of potential customers is stochastic and the (true) service time is also stochastic, the workload level of the expert changes dynamically over time, and impacts an arriving customer's valuation and hence his decision to seek service or not. In this paper, the authors analyze the optimal service strategy of a monopolist expert offering a credence good. The monopolist can choose which payment scheme to adopt (with a fixed and/or a variable component) and whether to reveal the workload information to the customer or not, as well as how much demand to induce, if at all. They use a simple queuing model with a Poisson arrival process of potential customers and exponential (true) service times to model the workload dynamics. They characterize the equilibrium strategies of the customer stream in response to possible strategies adopted by the expert. They then derive the expert's optimal pricing and workload information revelation strategy as a function of the characteristics of the environment (service capacity, potential market size, value of the service and waiting costs). They find that a monopolist expert has the highest incentive to induce service when the arrival rate of potential customers is slightly less than the true service rate. Under these conditions, he reveals the workload level and charges both a fixed and a variable rate fee. Interestingly, the expert attracts more customers in this case than an expert that never induces services. When the true service rate is significantly higher than the arrival rate, the expert prefers not to induce services, conceals the workload level and charges a fixed fee for the service. When the true service rate is significantly lower than the arrival rate, the expert prefers not to induce services, but reveals his workload level and charges a fixed fee only. Finally, they find that service induction may increase the total welfare composed of customer utility and expert profits.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2004/2004-46.pdf

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Copyright INSEAD. All rights reserved