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User Delay Costs and Internal Pricing for a Service Facility

Author

Listed:
  • Sanjeev Dewan

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

  • Haim Mendelson

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

Abstract

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.

Suggested Citation

  • Sanjeev Dewan & Haim Mendelson, 1990. "User Delay Costs and Internal Pricing for a Service Facility," Management Science, INFORMS, vol. 36(12), pages 1502-1517, December.
  • Handle: RePEc:inm:ormnsc:v:36:y:1990:i:12:p:1502-1517
    as

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    File URL: http://dx.doi.org/10.1287/mnsc.36.12.1502
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    References listed on IDEAS

    as
    1. Leech, Dennis, 1985. "Ownership Concentration and the Theory of the Firm : A Simple-Game-Theoretic Approach to Applied US Corporations in the 1930's," The Warwick Economics Research Paper Series (TWERPS) 262, University of Warwick, Department of Economics.
    2. Guillermo Owen, 1972. "Multilinear Extensions of Games," Management Science, INFORMS, vol. 18(5-Part-2), pages 64-79, January.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    delay cost; pricing; capacity; deficit;

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