On service degrade at a discount: Capacity, demand pooling, and optimal discounting
AbstractIn this paper we study the capacity investment decisions and operational strategies of a firm providing two-class services facing uncertain demands. The capacity decisions of the resources are made before demands are observed. Each service can be implemented by its corresponding resource. Should a mismatch between the capacity and the actual demand for the services arise, the low-class resource can be used as a substitute for the high-class service. We introduce an operational strategy called degrade-at-a-discount, where a price discount is offered to motivate customers to accept a lower class service when their original choice is out of capacity. By formulating the problem as a one-period, two-stage stochastic problem, we analyze how to set up the optimal capacity and the optimal discount. We also conduct a comprehensive numerical study to show the benefits of the degrade-at-a-discount strategy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Omega.
Volume (Year): 40 (2012)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/375/description#description
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harrison, J. Michael & Van Mieghem, Jan A., 1999. "Multi-resource investment strategies: Operational hedging under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 113(1), pages 17-29, February.
- Jan A. Van Mieghem & Nils Rudi, 2002. "Newsvendor Networks: Inventory Management and Capacity Investment with Discretionary Activities," Manufacturing & Service Operations Management, INFORMS, vol. 4(4), pages 313-335, August.
- Yu, Dennis Z. & Tang, Sammi Y. & Niederhoff, Julie, 2011. "On the benefits of operational flexibility in a distribution network with transshipment," Omega, Elsevier, vol. 39(3), pages 350-361, June.
- Huang, Di & Zhou, Hong & Zhao, Qiu-Hong, 2011. "A competitive multiple-product newsboy problem with partial product substitution," Omega, Elsevier, vol. 39(3), pages 302-312, June.
- Khouja, Moutaz, 1999. "The single-period (news-vendor) problem: literature review and suggestions for future research," Omega, Elsevier, vol. 27(5), pages 537-553, October.
- Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
- Dutta, Pankaj & Chakraborty, Debjani, 2010. "Incorporating one-way substitution policy into the newsboy problem with imprecise customer demand," European Journal of Operational Research, Elsevier, vol. 200(1), pages 99-110, January.
- Mahesh Nagarajan & S. Rajagopalan, 2008. "Inventory Models for Substitutable Products: Optimal Policies and Heuristics," Management Science, INFORMS, vol. 54(8), pages 1453-1466, August.
- Amit Eynan & Thierry Fouque, 2003. "Capturing the Risk-Pooling Effect Through Demand Reshape," Management Science, INFORMS, vol. 49(6), pages 704-717, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.