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Pricing and Priority Auctions in Queueing Systems with a Generalized Delay Cost Structure

Listed author(s):
  • Philipp Afèche

    ()

    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208-2009)

  • Haim Mendelson

    ()

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

Registered author(s):

    This paper studies alternative price-service mechanisms for a provider that serves customers whose delay cost depends on their service valuations. We propose a generalized delay cost structure that augments the standard additive model with a multiplicative component, capturing the interdependence between delay cost and values. We derive and compare the revenue-maximizing and socially optimal equilibria under uniform pricing, preemptive, and nonpreemptive priority auctions with an admission price. We find that the delay cost structure has a paramount effect on system behavior. The classical result that the revenue-maximizing admission price is higher and the utilization lower than is socially optimal can be reversed under our generalized structure, and we identify the conditions driving this reversal under each mechanism. We show that the conditional bid equilibria are unique and induce the socially optimal allocations. The auctions yield gains in system net value and provider profit over uniform pricing, which are dramatically larger for the preemptive mechanism. Both auctions perform better under multiplicative compared to additive delay costs. The highest-value customers always gain under the preemptive, but may lose under the nonpreemptive auction. The lowest-value customers always gain in either auction.

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    File URL: http://dx.doi.org/10.1287/mnsc.1030.0156
    Download Restriction: no

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 50 (2004)
    Issue (Month): 7 (July)
    Pages: 869-882

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    Handle: RePEc:inm:ormnsc:v:50:y:2004:i:7:p:869-882
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    1. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
    2. 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.
    3. Albert Y. Ha, 2001. "Optimal Pricing That Coordinates Queues with Customer-Chosen Service Requirements," Management Science, INFORMS, vol. 47(7), pages 915-930, July.
    4. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-286, July.
    5. Sanjeev Dewan & Haim Mendelson, 1998. "Information Technology and Time-Based Competition in Financial Markets," Management Science, INFORMS, vol. 44(5), pages 595-609, May.
    6. J. Christopher Westland, 1992. "Congestion and Network Externalities in the Short Run Pricing of Information System Services," Management Science, INFORMS, vol. 38(7), pages 992-1009, July.
    7. Lode Li & Yew Sing Lee, 1994. "Pricing and Delivery-Time Performance in a Competitive Environment," Management Science, INFORMS, vol. 40(5), pages 633-646, May.
    8. 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.
    9. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    10. De Vany, Arthur S, 1976. "Uncertainty, Waiting Time, and Capacity Utilization: A Stochastic Theory of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 523-541, June.
    11. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-86, July.
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