Date of this Version
Manufacturing & Service Operations Management
Recent operations management papers model customers as solving multiarmed bandit problems, positing that consumers use a particular heuristic when choosing among suppliers. These papers then analyze the resulting competition among suppliers and mathematically characterize the equilibrium actions. There remains a question, however, as to whether the original customer models on which the analyses are built are reasonable representations of actual consumer choice. In this paper, we empirically investigate how well these choice rules match actual performance as people solve two-armed Bernoulli bandit problems. We find that some of the most analytically tractable models perform best in tests of model fit. We also find that the expected number of consecutive trials of a given supplier is increasing in its expected quality level, with increasing differences, a result consistent with the models' predictions as well as with loyalty effects described in the popular management literature.
service quality, multiarmed bandit, decision-making under uncertainty, discrete-choice models, experimental tests
Gans, N., Knox, G., & Croson, R. (2007). Simple Models of Discrete Choice and Their Performance in Bandit Experiments. Manufacturing & Service Operations Management, 9 (4), 383-408. http://dx.doi.org/10.1287/msom.1060.0130
Date Posted: 27 November 2017
This document has been peer reviewed.