IDEAS home Printed from https://ideas.repec.org/a/eee/jomega/v40y2012i3p358-367.html
   My bibliography  Save this article

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

Author

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

Abstract

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/j.omega.2011.08.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0305048311001253
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.omega.2011.08.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

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

    References listed on IDEAS

    as
    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. 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.
    3. Mahesh Nagarajan & S. Rajagopalan, 2008. "Inventory Models for Substitutable Products: Optimal Policies and Heuristics," Management Science, INFORMS, vol. 54(8), pages 1453-1466, August.
    4. Arthur Hsu & Yehuda Bassok, 1999. "Random Yield and Random Demand in a Production System with Downward Substitution," Operations Research, INFORMS, vol. 47(2), pages 277-290, April.
    5. Yehuda Bassok & Ravi Anupindi & Ram Akella, 1999. "Single-Period Multiproduct Inventory Models with Substitution," Operations Research, INFORMS, vol. 47(4), pages 632-642, August.
    6. 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.
    7. Amit Eynan & Thierry Fouque, 2003. "Capturing the Risk-Pooling Effect Through Demand Reshape," Management Science, INFORMS, vol. 49(6), pages 704-717, June.
    8. Serguei Netessine & Nils Rudi, 2003. "Centralized and Competitive Inventory Models with Demand Substitution," Operations Research, INFORMS, vol. 51(2), pages 329-335, April.
    9. 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.
    10. Serguei Netessine & Gregory Dobson & Robert A. Shumsky, 2002. "Flexible Service Capacity: Optimal Investment and the Impact of Demand Correlation," Operations Research, INFORMS, vol. 50(2), pages 375-388, April.
    11. Robert A. Shumsky & Fuqiang Zhang, 2009. "Dynamic Capacity Management with Substitution," Operations Research, INFORMS, vol. 57(3), pages 671-684, June.
    12. Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
    13. 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.
    14. 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

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


    Cited by:

    1. Nikolaos Kourentzes & Dong Li & Arne K. Strauss, 2019. "Unconstraining methods for revenue management systems under small demand," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(1), pages 27-41, February.
    2. 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.
    3. Wang, Haiyan & Olsen, Tava Lennon & Liu, Guiqing, 2018. "Service capacity competition with peak arrivals and delay sensitive customers," Omega, Elsevier, vol. 77(C), pages 80-95.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shin, Hojung & Park, Soohoon & Lee, Euncheol & Benton, W.C., 2015. "A classification of the literature on the planning of substitutable products," European Journal of Operational Research, Elsevier, vol. 246(3), pages 686-699.
    2. 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.
    3. Kim, Nayeon & Montreuil, Benoit & Klibi, Walid & Zied Babai, M., 2023. "Network inventory deployment for responsive fulfillment," International Journal of Production Economics, Elsevier, vol. 255(C).
    4. Transchel, Sandra, 2017. "Inventory management under price-based and stockout-based substitution," European Journal of Operational Research, Elsevier, vol. 262(3), pages 996-1008.
    5. Jan A. Van Mieghem, 2003. "Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 269-302, July.
    6. Yueshan Yu & Xin Chen & Fuqiang Zhang, 2015. "Dynamic Capacity Management with General Upgrading," Operations Research, INFORMS, vol. 63(6), pages 1372-1389, December.
    7. Achal Bassamboo & Ramandeep S. Randhawa & Jan A. Van Mieghem, 2010. "Optimal Flexibility Configurations in Newsvendor Networks: Going Beyond Chaining and Pairing," Management Science, INFORMS, vol. 56(8), pages 1285-1303, August.
    8. Tibben-Lembke, Ronald S. & Bassok, Yehuda, 2005. "An inventory model for delayed customization: A hybrid approach," European Journal of Operational Research, Elsevier, vol. 165(3), pages 748-764, September.
    9. Jan A. Van Mieghem, 2007. "Risk Mitigation in Newsvendor Networks: Resource Diversification, Flexibility, Sharing, and Hedging," Management Science, INFORMS, vol. 53(8), pages 1269-1288, August.
    10. 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.
    11. Ebru K. Bish & Qiong Wang, 2004. "Optimal Investment Strategies for Flexible Resources, Considering Pricing and Correlated Demands," Operations Research, INFORMS, vol. 52(6), pages 954-964, December.
    12. Serguei Netessine & Gregory Dobson & Robert A. Shumsky, 2002. "Flexible Service Capacity: Optimal Investment and the Impact of Demand Correlation," Operations Research, INFORMS, vol. 50(2), pages 375-388, April.
    13. Lu, Fen & Xu, He & Chen, Pengyu & Zhu, Stuart X., 2018. "Joint pricing and production decisions with yield uncertainty and downconversion," International Journal of Production Economics, Elsevier, vol. 197(C), pages 52-62.
    14. Bish, Ebru K. & Hong, Seong J., 2006. "Coordinating the resource investment decision for a two-market, price-setting firm," International Journal of Production Economics, Elsevier, vol. 101(1), pages 63-88, May.
    15. Zhang, Ren-Qian & Zhang, Lan-Kang & Zhou, Wen-Hui & Saigal, Romesh & Wang, Hui-Wen, 2014. "The multi-item newsvendor model with cross-selling and the solution when demand is jointly normally distributed," European Journal of Operational Research, Elsevier, vol. 236(1), pages 147-159.
    16. Yancong Zhou & Junqing Sun, 2013. "Inventory Decisions in a Product-Updated System with Component Substitution and Product Substitution," Discrete Dynamics in Nature and Society, Hindawi, vol. 2013, pages 1-9, March.
    17. Jie Zhang & Weijun Xie & Subhash C. Sarin, 2021. "Multiproduct Newsvendor Problem with Customer-Driven Demand Substitution: A Stochastic Integer Program Perspective," INFORMS Journal on Computing, INFORMS, vol. 33(3), pages 1229-1244, July.
    18. Saurabh Bansal & James S. Dyer, 2017. "Technical Note—Multivariate Partial-Expectation Results for Exact Solutions of Two-Stage Problems," Operations Research, INFORMS, vol. 65(6), pages 1526-1534, December.
    19. Robert A. Shumsky & Fuqiang Zhang, 2009. "Dynamic Capacity Management with Substitution," Operations Research, INFORMS, vol. 57(3), pages 671-684, June.
    20. Hekimoğlu, Mustafa & Scheller-Wolf, Alan, 2023. "Dual sourcing models with stock-out dependent substitution," European Journal of Operational Research, Elsevier, vol. 311(2), pages 472-485.

    Corrections

    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.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/375/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.