IDEAS home Printed from
   My bibliography  Save this article

On service degrade at a discount: Capacity, demand pooling, and optimal discounting


  • Su, Ping
  • Tian, Zhongjun
  • Wang, Haiyan


In 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.

Suggested Citation

  • Su, Ping & Tian, Zhongjun & Wang, Haiyan, 2012. "On service degrade at a discount: Capacity, demand pooling, and optimal discounting," Omega, Elsevier, vol. 40(3), pages 358-367.
  • Handle: RePEc:eee:jomega:v:40:y:2012:i:3:p:358-367 DOI: 10.1016/

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. 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.
    2. 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.
    3. 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.
    4. Amit Eynan & Thierry Fouque, 2003. "Capturing the Risk-Pooling Effect Through Demand Reshape," Management Science, INFORMS, vol. 49(6), pages 704-717, June.
    5. Mahesh Nagarajan & S. Rajagopalan, 2008. "Inventory Models for Substitutable Products: Optimal Policies and Heuristics," Management Science, INFORMS, vol. 54(8), pages 1453-1466, August.
    6. 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.
    7. Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
    8. 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.
    9. 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.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Wang, Yulan & Wallace, Stein W. & Shen, Bin & Choi, Tsan-Ming, 2015. "Service supply chain management: A review of operational models," European Journal of Operational Research, Elsevier, vol. 247(3), pages 685-698.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jomega:v:40:y:2012:i:3:p:358-367. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.