User Delay Costs and Internal Pricing for a Service Facility
AbstractThis 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.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 36 (1990)
Issue (Month): 12 (December)
delay cost; pricing; capacity; deficit;
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