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User Delay Costs and Internal Pricing for a Service Facility

  • Sanjeev Dewan

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

  • Haim Mendelson

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

Registered author(s):

    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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    File URL: http://dx.doi.org/10.1287/mnsc.36.12.1502
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    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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