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Near†Optimality of Coarse Service Grades for Customer Differentiation in Queueing Systems

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  • Hamid Nazerzadeh
  • Ramandeep S. Randhawa

Abstract

We analyze a service firm that caters to price and delay†sensitive customers who are differentiated on both their value for the service and the cost of waiting. There is a continuum of customer types in our setting and we model each customer's cost of waiting to be linear in the delay incurred with a multiplier that is an increasing linear or sub†linear function of the customer's value for the service. Using a large system approach, we characterize the firm's revenue maximizing menu of price and delay quotations and the value of customer differentiation. We further characterize the value of offering coarse or few service grades and find that offering two service grades is asymptotically optimal on the typical square†root scale, relative to the optimal policy.

Suggested Citation

  • Hamid Nazerzadeh & Ramandeep S. Randhawa, 2018. "Near†Optimality of Coarse Service Grades for Customer Differentiation in Queueing Systems," Production and Operations Management, Production and Operations Management Society, vol. 27(3), pages 578-595, March.
    • Handle: RePEc:bla:popmgt:v:27:y:2018:i:3:p:578-595
    DOI: 10.1111/poms.12818
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    Cited by:

    1. Xu Yong & Liu Jian & Ma Baomei & Zhang Shuai, 2018. "Service Mechanism and Pricing Based on Fairness Preference of Customers in Queuing System," Journal of Systems Science and Information, De Gruyter, vol. 6(6), pages 481-494, December.
    2. Luyi Yang & Zhongbin Wang & Shiliang Cui, 2021. "A Model of Queue Scalping," Management Science, INFORMS, vol. 67(11), pages 6803-6821, November.
    3. Zhe George Zhang & Xiaoling Yin, 2021. "Designing a Sustainable Two‐Tier Service System with Customer's Asymmetric Preference for Servers," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 3856-3880, November.
    4. Zhao, Chen & Wang, Zhongbin, 2023. "The impact of line-sitting on a two-server queueing system," European Journal of Operational Research, Elsevier, vol. 308(2), pages 782-800.
    5. 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.
    6. Zhongbin Wang & Luyi Yang & Shiliang Cui & Jinting Wang, 2021. "In-queue priority purchase: a dynamic game approach," Queueing Systems: Theory and Applications, Springer, vol. 97(3), pages 343-381, April.
    7. Yiwei Chen & Cong Shi, 2019. "Joint Pricing and Inventory Management with Strategic Customers," Operations Research, INFORMS, vol. 67(6), pages 1610-1627, November.
    8. Shiliang Cui & Zhongbin Wang & Luyi Yang, 2020. "The Economics of Line-Sitting," Management Science, INFORMS, vol. 66(1), pages 227-242, January.
    9. Yiwei Chen & Vivek F. Farias & Nikolaos Trichakis, 2019. "On the Efficacy of Static Prices for Revenue Management in the Face of Strategic Customers," Management Science, INFORMS, vol. 65(12), pages 5535-5555, December.
    10. Itai Gurvich & Martin A. Lariviere & Can Ozkan, 2019. "Coverage, Coarseness, and Classification: Determinants of Social Efficiency in Priority Queues," Management Science, INFORMS, vol. 65(3), pages 1061-1075, March.

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