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Optimal Pricing of Priority Services

Author

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  • S. Rao

    (Queen's University, Kingston, Ontario, Canada)

  • E. R. Petersen

    (Queen's University, Kingston, Ontario, Canada)

Abstract

We consider the problem of a service facility that offers m different priority classes to its n customers, and sets a tariff (price-schedule) to maximize profit. Each customer must use the service facility and will select an output rate and the priority classes used to maximize profit. The problem is formulated as a noncooperative game. We show that equilibrium output rates and assignments to priority classes can be determined by solving the integrated system problem (ISP) that maximizes the joint profit of all agents. The service facility can be represented by a network, and ISP is a traffic assignment problem. A tariff schedule that induces each customer to select the integrated system output rate and assignment is said to be vertically efficient. We show that the server can select vertically efficient tariffs that result in an equilibrium. Optimal pricing for the special case where the service facility is modeled as a priority queue is discussed. Examples are included to illustrate the results.

Suggested Citation

  • S. Rao & E. R. Petersen, 1998. "Optimal Pricing of Priority Services," Operations Research, INFORMS, vol. 46(1), pages 46-56, February.
    • Handle: RePEc:inm:oropre:v:46:y:1998:i:1:p:46-56
    DOI: 10.1287/opre.46.1.46
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    References listed on IDEAS

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    3. Xiaojun Liang & Yinghui Tang, 2019. "The improvement upon the reliability of the k-out-of-n:F system with the repair rates differentiation policy," Operational Research, Springer, vol. 19(2), pages 479-500, June.
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    5. Zhang, Jian & Nault, Barrie R. & Tu, Yiliu, 2015. "A dynamic pricing strategy for a 3PL provider with heterogeneous customers," International Journal of Production Economics, Elsevier, vol. 169(C), pages 31-43.
    6. Nilay Tan{i}k Argon & Serhan Ziya, 2009. "Priority Assignment Under Imperfect Information on Customer Type Identities," Manufacturing & Service Operations Management, INFORMS, vol. 11(4), pages 674-693, June.
    7. 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.
    8. Philipp Afèche & 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.
    9. Philipp Afèche & J. Michael Pavlin, 2016. "Optimal Price/Lead-Time Menus for Queues with Customer Choice: Segmentation, Pooling, and Strategic Delay," Management Science, INFORMS, vol. 62(8), pages 2412-2436, August.
    10. Ying Xu & Alan Scheller-Wolf & Katia Sycara, 2015. "The Benefit of Introducing Variability in Single-Server Queues with Application to Quality-Based Service Domains," Operations Research, INFORMS, vol. 63(1), pages 233-246, February.
    11. Erica L. Plambeck, 2004. "Optimal Leadtime Differentiation via Diffusion Approximations," Operations Research, INFORMS, vol. 52(2), pages 213-228, April.
    12. Rajat Talak & D. Manjunath & Alexandre Proutiere, 2019. "Strategic arrivals to queues offering priority service," Queueing Systems: Theory and Applications, Springer, vol. 92(1), pages 103-130, June.
    13. 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.
    14. Yasushi Masuda & Seungjin Whang, 2006. "On the Optimality of Fixed-up-to Tariff for Telecommunications Service," Information Systems Research, INFORMS, vol. 17(3), pages 247-253, September.
    15. Albert Y. Ha, 2001. "Optimal Pricing That Coordinates Queues with Customer-Chosen Service Requirements," Management Science, INFORMS, vol. 47(7), pages 915-930, July.
    16. Philipp Afèche & Opher Baron & Joseph Milner & Ricky Roet-Green, 2019. "Pricing and Prioritizing Time-Sensitive Customers with Heterogeneous Demand Rates," Operations Research, INFORMS, vol. 67(4), pages 1184-1208, July.
    17. Zhang, Zhongju & Dey, Debabrata & Tan, Yong, 2008. "Price and QoS competition in data communication services," European Journal of Operational Research, Elsevier, vol. 187(3), pages 871-886, June.
    18. Liu, Jian & Chen, Jian & Bo, Rui & Meng, Fanlin & Xu, Yong & Li, Peng, 2023. "Increases or discounts: Price strategies based on customers’ patience times," European Journal of Operational Research, Elsevier, vol. 305(2), pages 722-737.

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