Is Capacity Rationing Optimal When Customers Use Anecdotal Reasoning?

In this paper, we study strategic capacity rationing when customers have boundedly rational expectations in the sense of anecdotal reasoning. Our S(K) model generalizes the existing literature by allowing customer expectations to be boundedly rational, and reduces to the rational-expectations model when the level of rationality K is infinite. We distinguish two settings: (i) capacity commitment, where the firm commits to its capacity level in the long run, or (ii) the firm dynamically changes it in each season. For both settings, within the S(1) framework, we prove that strategic capacity rationing is not optimal independent of customer risk preferences. Then, using the general S(K) framework, we provide sufficient technical conditions for capacity rationing to be optimal for both settings respectively. Numerical studies show that the result of capacity rationing being suboptimal is fairly robust to not too large K. This paper demonstrates how boundedly rational expectations in the sense of anecdotal reasoning impact the firm's capacity rationing policy, which contrasts with the exiting result under rational expectations