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User Delay Costs and Internal Pricing for a Service Facility


Author Info

  • Sanjeev Dewan

    (Department of Decision Sciences, George Mason University, Fairfax, Virginia 22030)

  • Haim Mendelson

    (Graduate School of Business, Stanford University, Stanford, California 94305)

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    This 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 Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 36 (1990)
    Issue (Month): 12 (December)
    Pages: 1502-1517

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    Handle: RePEc:inm:ormnsc:v:36:y:1990:i:12:p:1502-1517

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    Keywords: delay cost; pricing; capacity; deficit;


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    Cited by:
    1. So, Kut C. & Song, Jing-Sheng, 1998. "Price, delivery time guarantees and capacity selection," European Journal of Operational Research, Elsevier, vol. 111(1), pages 28-49, November.
    2. Jayaswal, Sachin & Jewkes, Elizabeth & Ray, Saibal, 2011. "Product differentiation and operations strategy in a capacitated environment," European Journal of Operational Research, Elsevier, vol. 210(3), pages 716-728, May.
    3. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, EconWPA.
    4. Ke-Wei Huang & Arun Sundararajan, 2006. "Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure," Working Papers 06-11, NET Institute, revised Sep 2006.
    5. Jiang, Bin, 2005. "The decision-making on an in-house logistic division's operation strategies," International Journal of Production Economics, Elsevier, vol. 96(1), pages 37-46, April.
    6. Arun Sundararajan, 2003. "Network Effects, Nonlinear Pricing and Entry Deterrence," Industrial Organization 0307002, EconWPA.
    7. Mei Xue & Patrick T. Harker, 2003. "Service Co-Production, Customer Efficiency and Market Competition," Center for Financial Institutions Working Papers 03-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Watts, Alison, 2002. "Uniqueness of equilibrium in cost sharing games," Journal of Mathematical Economics, Elsevier, vol. 37(1), pages 47-70, February.
    9. Grassmann, Winfried K., 1996. "Optimizing steady state Markov chains by state reduction," European Journal of Operational Research, Elsevier, vol. 89(2), pages 277-284, March.
    10. S. Bhulai & A.C. Brooms, 2008. "Approximate Expected Delay Costs for Call and Contact Centre models under Light Traffic Regimes," Birkbeck Working Papers in Economics and Finance 0805, Birkbeck, Department of Economics, Mathematics & Statistics.
    11. Benjamin Golub & R. McAfee, 2011. "Firms, queues, and coffee breaks: a flow model of corporate activity with delays," Review of Economic Design, Springer, vol. 15(1), pages 59-89, March.
    12. van Ackere, Ann & Larsen, Erik R., 2004. "Self-organising behaviour in the presence of negative externalities: A conceptual model of commuter choice," European Journal of Operational Research, Elsevier, vol. 157(2), pages 501-513, September.
    13. Ray, Saibal & Jewkes, E. M., 2004. "Customer lead time management when both demand and price are lead time sensitive," European Journal of Operational Research, Elsevier, vol. 153(3), pages 769-781, March.
    14. van Ackere, Ann, 1996. "The management of congestion," European Journal of Operational Research, Elsevier, vol. 89(2), pages 223-225, March.
    15. Wang, E. T. G., 2000. "Information and incentives in computing services supply: The effect of limited system choices," European Journal of Operational Research, Elsevier, vol. 125(3), pages 503-518, September.
    16. van Ackere, Ann, 1995. "Capacity management: Pricing strategy, performance and the role of information," International Journal of Production Economics, Elsevier, vol. 40(1), pages 89-100, June.
    17. Yezekael Hayel & Mohamed Ouarraou & Bruno Tuffin, 2007. "Optimal Measurement-based Pricing for an M/M/1 Queue," Networks and Spatial Economics, Springer, vol. 7(2), pages 177-195, June.
    18. Bertrand, J. Will M. & van Ooijen, Henny P.G., 2012. "The capacity investment decision for make-to-order production systems with demand rate control," International Journal of Production Economics, Elsevier, vol. 137(2), pages 272-283.
    19. Aktaran-KalaycI, Tûba & Ayhan, Hayriye, 2009. "Sensitivity of optimal prices to system parameters in a steady-state service facility," European Journal of Operational Research, Elsevier, vol. 193(1), pages 120-128, February.


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