Behavior-Based Pricing in Congestion-Prone Systems


             Department of Decisions, Operations and Technology


Department of Systems Engineering and Engineering Management

                                             Seminar (OM)


Date: Wednesday, October 25, 2023, 2:00 pm HKT

Venue: Room 214, Cheng Yu Tung Building, CUHK

Title: Behavior-Based Pricing in Congestion-Prone Systems

Speaker: Prof. Dongyuan ZHAN, UCL School of Management University College London, United Kingdom



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 extant research has examined the impacts of BBP on the market, most of this research ignores the congestion effect in serving each consumer. This research extends the literature by investigating the effect of promised delay (PD) on platforms and consumers and reveals the implications of BBP in competing congestion-prone systems such as DoorDash and Uber Eats. We establish a two-period dynamic game-theoretic duopoly model embedded with a queueing system, where a PD that captures the service quality is committed to consumers before the start of the sales season. We uncover that the heterogeneity of PD fundamentally affects the impacts of BBP. First, we find that BBP may benefit the platform that provides a lower service quality because of the free riding effect. Second, contrary to the conventional wisdom that BBP always reduces social welfare because of inefficient consumer switching in the second period, we reveal that, somewhat surprisingly, overall social welfare can be improved by using BBP due to the load balancing effect. Third, when PD decisions are endogenized, the practice of BBP may lower the service quality and increase the operational efficiency of the industry in the long run, reversing its benefit to consumers but improving the profits of platforms. Moreover, endogenized PD results in a Matthew effect where the platform with higher base value commits to a lower PD. BBP exacerbates this effect and further widens the quality gap between platforms.

This is joint work with Lei Fang, Ying Ouyang and Zhongbin Wang.


Everyone is welcome to attend the talk!

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Wednesday, October 25, 2023 - 14:00