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Optimal Scheduling and Incentive Compatible Pricing for a Service System with Quality of Service Guarantees

Author

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  • Vernon N. Hsu

    () (Department of Decision Sciences and Managerial Economics, Faculty of Business Administration, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong)

  • Susan H. Xu

    () (Department of Supply Chain and Information Systems, Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

  • Boris Jukic

    () (School of Business, Clarkson University, Potsdam, New York 13699)

Abstract

This paper proposes a resource allocation and pricing mechanism for a service system that serves multiple classes of jobs within an organization. Each class of service request is subject to a class-dependent quality of service (QoS) guarantee on the expected delay bound, which may be imposed by business rules in an organization or other application-specific technical constraints. We develop an extension of a resource allocation and pricing mechanism for an M/M/1 system. In contrast to the system without the QoS guarantee, where a fixed priority scheduling policy--known as the c\mu rule--is optimal, we show that the system may need to adopt a more general randomized priority scheduling policy to maximize the overall system profit. We also develop a transfer pricing scheme that is both optimal and incentive compatible, allowing users to act in their self-interests while collectively achieving the system optimum. We show that the pricing scheme with the QoS guarantee depends on the scheduling policy implemented and has different characteristics from that without the QoS guarantee.

Suggested Citation

  • 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.
  • Handle: RePEc:inm:ormsom:v:11:y:2009:i:3:p:375-396
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    File URL: http://dx.doi.org/10.1287/msom.1080.0226
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    References listed on IDEAS

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    1. Albert Y. Ha, 2001. "Optimal Pricing That Coordinates Queues with Customer-Chosen Service Requirements," Management Science, INFORMS, vol. 47(7), pages 915-930, July.
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    3. 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.
    4. Gupta, Alok & Stahl, Dale O. & Whinston, Andrew B., 1997. "A stochastic equilibrium model of internet pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 697-722, May.
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    6. 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.
    7. 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.
    8. Knudsen, Niels Chr, 1972. "Individual and Social Optimization in a Multiserver Queue with a General Cost-Benefit Structure," Econometrica, Econometric Society, vol. 40(3), pages 515-528, May.
    9. Yasushi Masuda & Seungjin Whang, 1999. "Dynamic Pricing for Network Service: Equilibrium and Stability," Management Science, INFORMS, vol. 45(6), pages 857-869, June.
    10. Robert J. Dolan, 1978. "Incentive Mechanisms for Priority Queuing Problems," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 421-436, Autumn.
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