Near†Optimality of Coarse Service Grades for Customer Differentiation in Queueing Systems

Hamid Nazerzadeh and Ramandeep S. Randhawa

Production and Operations Management, 2018, vol. 27, issue 3, 578-595

Abstract: We analyze a service firm that caters to price and delay†sensitive customers who are differentiated on both their value for the service and the cost of waiting. There is a continuum of customer types in our setting and we model each customer's cost of waiting to be linear in the delay incurred with a multiplier that is an increasing linear or sub†linear function of the customer's value for the service. Using a large system approach, we characterize the firm's revenue maximizing menu of price and delay quotations and the value of customer differentiation. We further characterize the value of offering coarse or few service grades and find that offering two service grades is asymptotically optimal on the typical square†root scale, relative to the optimal policy.

Date: 2018
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