Pricing and Capacity Allocation for Shared Services

Vasiliki Kostami (), Dimitris Kostamis () and Serhan Ziya ()
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Vasiliki Kostami: London Business School, London NW1 4SA, United Kingdom
Dimitris Kostamis: Kenan–Flagler Business School, University of North Carolina, Chapel Hill, North Carolina 27599
Serhan Ziya: Department of Statistics and Operations Research, University of North Carolina, Chapel Hill, North Carolina 27599

Manufacturing & Service Operations Management, 2017, vol. 19, issue 2, 230-245

Abstract: We study the pricing and capacity allocation problem of a service provider who serves two distinct customer classes. Customers in each class are inherently heterogeneous in their willingness to pay for service, but their utilities are also affected by the presence of other customers in the system. Specifically, customer utilities depend on how many customers are in the system at the time of service as well as who these other customers are. We find that if the service provider can price discriminate between customer classes, pricing out a class, i.e., operating an exclusive system, can sometimes be optimal and depends only on classes’ perceptions of each other. If the provider must charge a single price, an exclusive system is even more likely. We extend our analysis to a service provider who can prevent class interaction by allocating separate capacity segments to the two customer classes. Under price discrimination, allocating capacity is optimal if the “net appreciation” between classes, as defined in the paper, is negative. However, under a single-price policy, allocating capacity can be optimal even if this net appreciation is positive. We describe in detail how the nature of asymmetry in classes’ perception of each other determines the optimal strategy.

Keywords: customer mix; customer interaction; price discrimination; capacity allocation; shared services (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (10)

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