IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v193y2009i1p120-128.html
   My bibliography  Save this article

Sensitivity of optimal prices to system parameters in a steady-state service facility

Author

Listed:
  • Aktaran-KalaycI, Tûba
  • Ayhan, Hayriye

Abstract

We consider the problem of maximizing the long-run average reward in a service facility with dynamic pricing. We investigate sensitivity of optimal pricing policies to the parameters of the service facility which is modelled as an M/M/s/K queueing system. Arrival process to the facility is Poisson with arrival rate a decreasing function of the price currently being charged by the facility. We prove structural results on the optimal pricing policies when the parameters in the facility change. Namely, we show that optimal prices decrease when the capacity of the facility or the number of servers in the facility increase. Under a reasonable assumption, we also show that optimal prices increase as the overall demand for the service provided by the facility increases or when the service rate of the facility decreases. We illustrate how these structural results simplify the required computational effort while finding the optimal policy.

Suggested Citation

  • Aktaran-KalaycI, Tûba & Ayhan, Hayriye, 2009. "Sensitivity of optimal prices to system parameters in a steady-state service facility," European Journal of Operational Research, Elsevier, vol. 193(1), pages 120-128, February.
    • Handle: RePEc:eee:ejores:v:193:y:2009:i:1:p:120-128
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377-2217(07)01064-8
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Uri Yechiali, 1971. "On Optimal Balking Rules and Toll Charges in the GI / M /1 Queuing Process," Operations Research, INFORMS, vol. 19(2), pages 349-370, April.
    2. 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.
    3. Edelson, Noel M & Hildebrand, David K, 1975. "Congestion Tolls for Poisson Queuing Processes," Econometrica, Econometric Society, vol. 43(1), pages 81-92, January.
    4. David W. Low, 1974. "Optimal Dynamic Pricing Policies for an M / M / s Queue," Operations Research, INFORMS, vol. 22(3), pages 545-561, June.
    5. 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.
    6. Steven A. Lippman & Shaler Stidham, 1977. "Individual versus Social Optimization in Exponential Congestion Systems," Operations Research, INFORMS, vol. 25(2), pages 233-247, April.
    7. Shaler Stidham, 1992. "Pricing and Capacity Decisions for a Service Facility: Stability and Multiple Local Optima," Management Science, INFORMS, vol. 38(8), pages 1121-1139, August.
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xinchang Wang & Sigrún Andradóttir & Hayriye Ayhan, 2019. "Optimal pricing for tandem queues with finite buffers," Queueing Systems: Theory and Applications, Springer, vol. 92(3), pages 323-396, August.
    2. A. Baykal Hafızoğlu & Esma S. Gel & Pınar Keskinocak, 2016. "Price and Lead Time Quotation for Contract and Spot Customers," Operations Research, INFORMS, vol. 64(2), pages 406-415, April.
    3. Secil Savasaneril & Ece Sayin, 2017. "Dynamic lead time quotation under responsive inventory and multiple customer classes," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 39(1), pages 95-135, January.
    4. Seçil Savaşaneril & Paul M. Griffin & Pınar Keskinocak, 2010. "Dynamic Lead-Time Quotation for an M/M/1 Base-Stock Inventory Queue," Operations Research, INFORMS, vol. 58(2), pages 383-395, April.
    5. Demet Batur & Jennifer K. Ryan & Zhongyuan Zhao & Mehmet C. Vuran, 2019. "Dynamic Pricing of Wireless Internet Based on Usage and Stochastically Changing Capacity," Manufacturing & Service Operations Management, INFORMS, vol. 21(4), pages 833-852, October.
    6. Samuel Vercraene & Jean-Philippe Gayon & Fikri Karaesmen, 2018. "Effects of System Parameters on the Optimal Cost and Policy in a Class of Multidimensional Queueing Control Problems," Operations Research, INFORMS, vol. 66(1), pages 150-162, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sumita, Ushio & Masuda, Yasushi & Yamakawa, Shigetaka, 2001. "Optimal internal pricing and capacity planning for service facility with finite buffer," European Journal of Operational Research, Elsevier, vol. 128(1), pages 192-205, January.
    2. 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.
    3. Larsen, Christian, 1998. "Investigating sensitivity and the impact of information on pricing decisions in an M/M/1/ [infinity] queueing model," International Journal of Production Economics, Elsevier, vol. 56(1), pages 365-377, September.
    4. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    5. Mei Xue & Patrick T. Harker, 2003. "Service Co-Production, Customer Efficiency and Market Competition," Center for Financial Institutions Working Papers 03-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Y Perlman & M Kaspi, 2007. "Centralized decision of internal transfer-prices with congestion externalities for two modes of repair with limited repair capacity," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(9), pages 1178-1184, September.
    7. Zhou, Wenhui & Lian, Zhaotong & Wu, Jinbiao, 2014. "When should service firms provide free experience service?," European Journal of Operational Research, Elsevier, vol. 234(3), pages 830-838.
    8. Li, Xin & Chen, Hsing Hung & Tao, Xiangnan, 2016. "Pricing and capacity allocation in renewable energy," Applied Energy, Elsevier, vol. 179(C), pages 1097-1105.
    9. Shone, Rob & Knight, Vincent A. & Williams, Janet E., 2013. "Comparisons between observable and unobservable M/M/1 queues with respect to optimal customer behavior," European Journal of Operational Research, Elsevier, vol. 227(1), pages 133-141.
    10. van Ackere, Ann, 1995. "Capacity management: Pricing strategy, performance and the role of information," International Journal of Production Economics, Elsevier, vol. 40(1), pages 89-100, June.
    11. 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.
    12. van Ackere, Ann, 1996. "The management of congestion," European Journal of Operational Research, Elsevier, vol. 89(2), pages 223-225, March.
    13. Refael Hassin & Ran I. Snitkovsky, 2020. "Social and Monopoly Optimization in Observable Queues," Operations Research, INFORMS, vol. 68(4), pages 1178-1198, July.
    14. Wang, E. T. G., 2000. "Information and incentives in computing services supply: The effect of limited system choices," European Journal of Operational Research, Elsevier, vol. 125(3), pages 503-518, September.
    15. Tingliang Huang & Gad Allon & Achal Bassamboo, 2013. "Bounded Rationality in Service Systems," Manufacturing & Service Operations Management, INFORMS, vol. 15(2), pages 263-279, May.
    16. Anthony M. Kwasnica & Euthemia Stavrulaki, 2008. "Competitive location and capacity decisions for firms serving time‐sensitive customers," Naval Research Logistics (NRL), John Wiley & Sons, vol. 55(7), pages 704-721, October.
    17. 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.
    18. Ke-Wei Huang & Arun Sundararajan, 2006. "Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure," Working Papers 06-11, NET Institute, revised Sep 2006.
    19. Philipp Afèche & Opher Baron & Yoav Kerner, 2013. "Pricing Time-Sensitive Services Based on Realized Performance," Manufacturing & Service Operations Management, INFORMS, vol. 15(3), pages 492-506, July.
    20. Gregory Dobson & Euthemia Stavrulaki, 2007. "Simultaneous price, location, and capacity decisions on a line of time‐sensitive customers," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(1), pages 1-10, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:193:y:2009:i:1:p:120-128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.