AbstractCapacity decisions in service operations often involve a trade-off between operating cost and the level of service offered to customers. Although the cost of attaining a pre-specified level of service has been well-studied, there isn't much research studying how customer service levels affect revenue and profit. This paper conducts an empirical study to analyze how waiting in a queue in the context of a retail store affects customer purchasing behavior. Our methodology uses a novel technology based on digital imaging to record periodic information about the queuing system. Our econometric methodology integrates these data with point-of-sales information to estimate the effect of queues on purchases. We find that waiting in queue has a non-linear effect on purchase incidence and that customers appear to primarily focus on the length of the queue rather than the actual expected wait when making their purchase decisions. We also find that customer sensitivity to waiting is heterogeneous and negatively correlated with price sensitivity. We discuss implications of these results in the context of service design and category pricing.
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