User Delay Costs and Internal Pricing for a Service Facility

Sanjeev Dewan and Haim Mendelson
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Sanjeev Dewan: Department of Decision Sciences, George Mason University, Fairfax, Virginia 22030
Haim Mendelson: Graduate School of Business, Stanford University, Stanford, California 94305

Management Science, 1990, vol. 36, issue 12, 1502-1517

Abstract: This paper studies optimal pricing and capacity decisions for a service facility in an environment where users' delay cost is important. The model assumes a general nonlinear delay cost structure and incorporates the tradeoff between the delay cost and capacity cost. We find necessary and sufficient conditions for the optimality of a pricing rule that charges out service resources at their marginal capacity cost. We examine the issue of budgetary balance and find that net-value maximization entails a budget deficit for the service facility; that is, the service facility should be evaluated as a "deficit center." The results provide guidelines under which the optimal magnitude of the deficit can be determined.

Keywords: delay cost; pricing; capacity; deficit (search for similar items in EconPapers)
Date: 1990
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:36:y:1990:i:12:p:1502-1517

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