Tamer Boyaci

ESMT Working Paper

Consumer choice under limited attention when alternatives have different information costs

ESMT Working Paper No. 16-04 (R3)
Frank Huettner, Tamer Boyaci, Yalçın Akçay (2018)
Subject(s): Product and operations management
Keyword(s): Discrete choice, rational inattention, information acquisition, non-uniform information costs, market inference
JEL Code(s): D40, D80

Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers trade-off the value of better information against its cost, and make their final product choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer’s choice behavior when she faces alternatives with different information costs. To this end, we introduce an information cost function that distinguishes between direct and implied information. We then analytically characterize the optimal choice probabilities. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. There are significant implications on how a seller should provide information about its products and how changes to the product set impacts consumer choice. For example, non-uniform information costs can lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product, and to situations where the addition of an inferior (never chosen) product increases the market share of another existing product (i.e., failure of regularity). We also provide an algorithm to compute the optimal choice probabilities and discuss how our framework can be empirically estimated from suitable choice data.

Pages 52
Publication Nr. 16-04 (R3)
ISSN 1866–3494 (Print)

ESMT Working Paper

Opaque queues: Service systems with rationally inattentive customers

ESMT Working Paper No. 18-04
Subject(s): Management sciences, decision sciences and quantitative methods
Keyword(s): Service operations, rational inattention, strategic customers, rational queueing, information costs, system throughput, social welfare

Classical models of service systems with rational and strategic customers assume queues to be either fully visible or invisible. In practice, however, most queues are only “partially visible” or “opaque”, in the sense that customers are not able to discern precise queue length upon arrival. This is because assessing queue length and associated delays require time, attention, and cognitive capacity which are all limited. Service firms may influence this information acquisition process through their choices of physical infrastructure and technology.
In this paper, we study rational queueing behavior when customers have limited time and attention. Following the theory of rational inattention, customers optimally select the type and amount of information to acquire and ignore any information that is not worth obtaining, trading off the benefits of information against its costs before deciding to join. We establish the existence and uniqueness of a customer equilibrium and delineate the impact of information costs. We show that although limited attention is advantageous for a firm in a congested system that customers value highly, it can be detrimental for less popular services that customers deem unrewarding. These insights remain valid when the firm optimally selects the price. We also discuss social welfare implications and provide prescriptive insights regarding information provision. Our framework naturally bridges visible and invisible queues, and can be extended to analyze richer customer behavior and complex queue structures, rendering it a valuable tool for service design.

Pages 42
Publication Nr. 18-04
ISSN 1866–3494 (Print)

ESMT Working Paper

Design for reusability and product reuse under radical innovation

ESMT Working Paper No. 16-02
Tamer Boyaci, Vedat Verter, Michael R. Galbreth (2016)
Subject(s): Product and operations management
Keyword(s): Reusability, reuse, innovation, Markov decision process

Many industries, including consumer electronics and telecommunications equipment, are characterized with
short product life-cycles, constant technological innovations, rapid product introductions, and fast obsolescence. Firms in such industries need to make frequent design changes to incorporate innovations, and the
effort to keep up with the rate of technological change often leaves little room for the consideration of product
reuse. In this paper, we study the design for reusability and product reuse decisions in the presence of both
a known rate of incremental innovations and a stochastic rate of radical innovations over time. We formulate
this problem as a Markov Decision Process. Our steady-state results confirm the conventional wisdom that a
higher probability of radical innovations would lead to reductions in the firm's investments in reusability as
well as the amount of reuse the firm ends up doing. Interestingly, the design for reusability decreases much
more slowly than the actual reuse. We identify some specific scenarios, however, where there is no tradeoff
between the possibility of radical innovations and the firms reusability and reuse decisions. Based on over
425,000 problem instances generated over the entire range of model parameters, we also provide insights
into the negative impact of radical innovations on firm profits, but show that the environmental impact of
increased radical innovation is not necessarily negative. Our results also have several implications for policy
makers seeking to encourage reuse.

Pages 36
Publication Nr. 16-02
ISSN 1866–3494 (Print)