Opaque pricing over vertically differentiated servers

Xin Geng

IISE Transactions, 2018, vol. 50, issue 7, 627-642

Abstract: We study a pricing problem for a service firm facing delay-sensitive customers. Servers are quality-differentiated, where the quality can be improved based on the servers’ past experience. In such cases, the commonly used pricing scheme fails to effectively facilitate the quality improvement for servers and therefore impedes the firm’s future revenue increase. Motivated by the probabilistic selling strategy, we propose another pricing scheme where the firm does not disclose the server assignment to the customers until payment is made. With respect to the long-run total revenue, we compare the two schemes and establish the superiority of the one that we propose. Moreover, we investigate how the revenue advantage from the proposed pricing scheme is affected by the quality improvement process and the degree of vertical differentiation, both of which are important features in the setting. Finally, we discuss the generalized model with heterogeneous arrival classes.

Date: 2018
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DOI: 10.1080/24725854.2018.1434332

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