Pricing and Prioritizing Time-Sensitive Customers with Heterogeneous Demand Rates

Philipp Afèche (), Opher Baron (), Joseph Milner () and Ricky Roet-Green ()
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Philipp Afèche: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Opher Baron: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Joseph Milner: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Ricky Roet-Green: Simon Business School, University of Rochester, Rochester, New York 14627

Operations Research, 2019, vol. 67, issue 4, 1184-1208

Abstract: We consider the pricing/lead-time menu design problem for a monopoly service in which time-sensitive customers have demand on multiple occasions. Customers differ in their demand rates and marginal values (per use). We assume that customers queue for a finite-capacity service under a general pricing structure. Customers choose a plan from the menu to maximize their expected utility. We compare two models: one in which the demand rate is the private information of the customers, and another in which the firm has full information. In the Aggregate Control Model the firm controls the number of plans it sells for each class of service but cannot track each customer’s usage level. In the Individual Control Model the firm can track the usage of individual customers but does not control the number of plans sold. In contrast to previous work, we show that, although we assume customers do not differ in their waiting cost, prioritizing customers may be optimal as a result of demand rate heterogeneity in the private information case. We provide necessary and sufficient conditions for this result. In particular, we show that for intermediate capacity, more-frequent-use customers that hold a lower marginal value per use should be prioritized. Further, less-frequent-use customers may receive a consumer surplus. We demonstrate the applicability of these results to relevant examples. The structure of the result implies that in some cases it may be beneficial for the firm to prioritize a customer class with a lower marginal waiting cost.

Keywords: capacity pricing; heterogeneous usage rates; priority queues (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (9)

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