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Designing professional services: Pricing and prioritization

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  • Chenguang (Allen) Wu
  • Chen Jin
  • Senthil Veeraraghavan

Abstract

We study the optimal design of a professional service in a mixed market of customers with heterogeneous skills and capabilities of using such service. Expert customers can avail of the service on their own, whereas amateur customers find it challenging to deploy the service and can only procure the service through an intermediary who resolves the technical issues. We develop a model that captures the essential trade‐offs in such settings: heterogeneity in customer expertise, decentralization between a service provider and intermediary, and congestion due to limited capacity. We analyze how customer expertise differences drive the equilibrium outcomes under various pricing and priority schemes. We find that a sufficient base of amateur customers allows expert customers to “free‐ride” under single pricing. Price discrimination can fully allay such free‐riding, but it may drive prices downward. Price discrimination also favors expert customers under the First‐Come‐First‐Served (FCFS) policy, but such preference is generally reversed under prioritization. Specifically, prioritizing amateur customers can bring revenue and welfare gains relative to the FCFS policy and a policy that prioritizes expert customers. Our results offer normative guidelines for managing professional services, clarifying regimes for price and priority discrimination, along with revenue and welfare implications.

Suggested Citation

  • Chenguang (Allen) Wu & Chen Jin & Senthil Veeraraghavan, 2023. "Designing professional services: Pricing and prioritization," Production and Operations Management, Production and Operations Management Society, vol. 32(8), pages 2578-2595, August.
    • Handle: RePEc:bla:popmgt:v:32:y:2023:i:8:p:2578-2595
    DOI: 10.1111/poms.13996
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    References listed on IDEAS

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    Cited by:

    1. Jian Liu & Yong‐Pin Zhou & Jian Chen, 2023. "Customer segmentation and ex ante fairness: A queueing perspective," Production and Operations Management, Production and Operations Management Society, vol. 32(10), pages 3246-3265, October.

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