Optimal Signaling Mechanisms in Unobservable Queues

In many systems with limited service capacity, customers must wait in a queue for service. When customers cannot observe the queue, how should a revenue-maximizing service provider convey information about wait times? In “Optimal Signaling Mechanisms in Unobservable Queues,” D. Lingenbrink and K. Iyer study this problem and characterize the structure of the optimal signaling mechanism. To signal optimally, the service provider uses two possible signals, “short” and “long,” to tell customers the queue length is short when below a threshold and long when above it. For the specific case of linear waiting costs, the authors explicitly compute this threshold. Furthermore, they show that for an optimally chosen fixed service price, optimal signaling produces the same expected revenue as a pricing mechanism that sets prices based on the number of customers waiting. This suggests that in settings where one cannot dynamically update prices, signaling can be effective in generating revenue.