Pricing and Capacity Sizing of a Service Facility: Customer Abandonment Effects

Chihoon Lee and Amy R. Ward

Production and Operations Management, 2019, vol. 28, issue 8, 2031-2043

Abstract: This paper studies the effect of customer abandonment in the economic optimization of a service facility. Specifically, we consider how to jointly set the price and service capacity in order to maximize the steady‐state expected profit, when the system is subject to customer abandonment and the price is paid only by customers that eventually receive service. We do this under the assumption that there is a high rate of prospective customer arrivals. Our analysis reveals that the economically optimal operating regime is consistent with the standard heavy traffic regime. Furthermore, we derive the following economic insight: when the capacity cost is sufficiently high, it can be advantageous for the system manager to “underinvest” in capacity and “take advantage of the abandonments” to trim congestion. Lastly, we show the loss in profit when customer abandonments are ignored is on the order of the square root of the demand rate.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/poms.13029

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:popmgt:v:28:y:2019:i:8:p:2031-2043

Ordering information: This journal article can be ordered from
http://onlinelibrary ... 1111/(ISSN)1937-5956

Access Statistics for this article

Production and Operations Management is currently edited by Kalyan Singhal

More articles in Production and Operations Management from Production and Operations Management Society
Bibliographic data for series maintained by Wiley Content Delivery ().