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Optimal Pricing That Coordinates Queues with Customer-Chosen Service Requirements

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  • Albert Y. Ha

    () (Yale School of Management, Yale University, 135 Prospect Street, New Haven, Connecticut 06511-3729)

Abstract

This article considers the problem of coordinating the admission rates and service requirements of a multiclass queue when these decisions are made on a decentralized basis. The customer classes are characterized by different demand patterns, delay costs, and service costs. Customers make individual decisions on whether to join the queue and, if so, their service requirements. Their class identities and service requirements are private information not known to the system manager. We develop a two-stage decision framework to analyze the problem and characterize the optimal admission rates and service requirements under both centralized and decentralized assumptions. We distinguish admission and service externality costs that lead to suboptimal performance under decentralized control. For a given service discipline, we derive optimal class-specific pricing schemes that can coordinate the system when only service requirements but not class identities are unobservable. When customer class identities are also unobservable, we consider two common service disciplines that offer undifferentiated service: processor sharing and first-come-first-served. Based on the general framework, for the M/G/s processor sharing queue, we show that a single variable fee (payment per unit of time in the system) can induce the optimal admission rates and service requirements for all customer classes. For the M/G/1 first-come-first-served queue, we show that a single pricing scheme that is quadratic in time in service can induce the optimal admission rates and service requirements for all customer classes. Our result demonstrates that, under suitable conditions, simple and undifferentiated pricing can coordinate complex queueing systems with heterogeneous customer classes.

Suggested Citation

  • Albert Y. Ha, 2001. "Optimal Pricing That Coordinates Queues with Customer-Chosen Service Requirements," Management Science, INFORMS, vol. 47(7), pages 915-930, July.
  • Handle: RePEc:inm:ormnsc:v:47:y:2001:i:7:p:915-930
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    File URL: http://dx.doi.org/10.1287/mnsc.47.7.915.9806
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    References listed on IDEAS

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    1. Albert Y. Ha, 1998. "Incentive-Compatible Pricing for a Service Facility with Joint Production and Congestion Externalities," Management Science, INFORMS, vol. 44(12-Part-1), pages 1623-1636, December.
    2. Colin E. Bell & Shaler Stidham, Jr., 1983. "Individual versus Social Optimization in the Allocation of Customers to Alternative Servers," Management Science, INFORMS, vol. 29(7), pages 831-839, July.
    3. Jan A. Van Mieghem, 2000. "Price and Service Discrimination in Queuing Systems: Incentive Compatibility of Gc\mu Scheduling," Management Science, INFORMS, vol. 46(9), pages 1249-1267, September.
    4. Moshe Haviv & Ya'acov Ritov, 1998. "Externalities, Tangible Externalities, and Queue Disciplines," Management Science, INFORMS, vol. 44(6), pages 850-858, June.
    5. Bradford, Richard M., 1996. "Pricing, routing, and incentive compatibility in multiserver queues," European Journal of Operational Research, Elsevier, vol. 89(2), pages 226-236, March.
    6. Hau Leung Lee & Morris A. Cohen, 1985. "Multi-Agent Customer Allocation in a Stochastic Service System," Management Science, INFORMS, vol. 31(6), pages 752-763, June.
    7. Lui, Francis T, 1985. "An Equilibrium Queuing Model of Bribery," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 760-781, August.
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    Cited by:

    1. Philipp Af├Ęche & Haim Mendelson, 2004. "Pricing and Priority Auctions in Queueing Systems with a Generalized Delay Cost Structure," Management Science, INFORMS, vol. 50(7), pages 869-882, July.
    2. Lauren Xiaoyuan Lu & Jan A. Van Mieghem & R. Canan Savaskan, 2009. "Incentives for Quality Through Endogenous Routing," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 254-273, July.
    3. Roland T. Rust & Tuck Siong Chung, 2006. "Marketing Models of Service and Relationships," Marketing Science, INFORMS, vol. 25(6), pages 560-580, 11-12.
    4. Vernon N. Hsu & Susan H. Xu & Boris Jukic, 2009. "Optimal Scheduling and Incentive Compatible Pricing for a Service System with Quality of Service Guarantees," Manufacturing & Service Operations Management, INFORMS, vol. 11(3), pages 375-396, May.
    5. repec:eee:ejores:v:262:y:2017:i:1:p:239-250 is not listed on IDEAS
    6. Yezekael Hayel & Mohamed Ouarraou & Bruno Tuffin, 2007. "Optimal Measurement-based Pricing for an M/M/1 Queue," Networks and Spatial Economics, Springer, vol. 7(2), pages 177-195, June.
    7. Wedad Elmaghraby & P{i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.

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