Reference Dependence in Queue Design and Pricing Strategies.

This article investigates how reference dependence—customers' psychological responses to waiting times relative to their expectations—affects queue behavior, pricing, and service design in service systems transitioning from a first-in-first-out (FIFO) model to one with paid priority lines. Using a nonpreemptive M/M/1 queuing framework, the study analyzes two scenarios: a captive customer system (CCS), where customers cannot balk, and a noncaptive customer system (NCCS), where customers may balk or seek alternatives. It finds that in CCS, service providers maximize revenue by segmenting customers, placing priority and regular queues visibly close to stimulate reference-dependent preferences, whereas maximizing social welfare calls for separating queues to reduce psychological disutility. In NCCS, optimal pricing and segmentation depend on the entrance fee, customers' loss aversion, and system load; notably, increasing service rates can paradoxically reduce revenue but improve social welfare. The study also extends the model to include positive reference-dependent gain utility for priority customers, concluding that loss aversion dominates and that tailored queue placement and pricing strategies can influence customer behavior and system performance. These insights offer guidance for service providers on balancing revenue and social welfare objectives while accounting for customers' psychological perceptions of waiting times.