Service degradation due to capacity expansion: A consequence of risk aversion

Abstract

Problem definition: While policymakers regularly add capacity to reduce congestion in public services like roads and hospitals, empirical studies show that adding resources does not always reduce congestion and waits. To clarify this phenomenon, we propose an explanatory model of rational risk-averse users who are less inclined to access services when waits are more variable.

Methodology/results: Using a rational queueing approach, we show that there are largely two opposite effects of increased resource capacity. The public interest benefits through improved throughput, while individual users can experience degraded service in terms of expected waits. We offer as an explanation that adding resource capacity reduces wait variability, so that wait-risk sensitive users will more readily join. In addition, we show that resource capacity not only influences the volume of demand but also its nature: increased service capacity attracts users who are less sensitive to expected wait and more sensitive to wait variability, which implies that large-capacity systems predominantly attract users who prefer reliability over efficiency.

Managerial implications: The phenomenon of wait time increase prompts a reevaluation of conventional wisdom regarding service capacity optimization. For instance, for revenue maximization, high holding costs may favor reducing service capacity over ceasing activity or expanding resources. Furthermore, to achieve a service level objective, pooling resources should be precluded. Moreover, having users highly sensitive to wait times is beneficial for reducing service costs.