Do You Want to Bet? New Service Operations Business Models Leveraging Consumers' Present-Biased Preferences
Posted: 26 May 2017 Last revised: 25 Jul 2019
Date Written: May 25, 2017
Humans tend to make time-inconsistent intertemporal choices and exhibit naivete about their self-control in the future, a human tendency identified and confirmed in behavioral economics and marketing literature as “present-biased preferences”. New service operations business models betting on this human tendency have been proliferating recently. Of critical interest is whether these new service operations business models generate a higher profit than the traditional retailer model? Our research shows that consumers’ valuation of the underlying product or service, how naïve consumers are in believing meeting the requirement in the future (i.e., their present-biased preferences), and how differently consumers treat losses versus gains (i.e., the loss aversion effect) are three key factors affecting the profitability of these new service operations models. More specifically, we find that when consumers’ valuation of the service is relatively low, the new service operation models outperform the traditional retailer model in terms of merchant’s profits. However, the traditional retailer model performs better when consumers’ valuation is high. We also characterize conditions under which the merchant’s optimal choice of the business model deviates from the social optimum.
Keywords: Service Operations Business Models, Present-Biased Preferences, Loss Aversion, Behavioral Economics
Suggested Citation: Suggested Citation