Cyclic pricing when customers queue with rating information

Abstract

Consider a situation where a service provider serves two types of customers, sophisticated and naive. Sophisticated customers are well-informed of service-related information and make their joining-or-balking decisions strategically, whereas naive customers do not have such information and rely on online rating information to make such decisions. We demonstrate that under certain conditions a service provider can increase its profitability by simply “dancing” its price, that is, replacing the static pricing strategy with a high-low cyclic pricing strategy. The success of this strategy relies on two key conditions: the potential market size is large enough so that congestion is a key concern in the service system, and the rating provides the average price and average utility information. Finally, we show that the cyclic pricing strategy is not socially optimal.