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User Delay Costs and Internal Pricing for a Service Facility

Author

Listed:
  • Sanjeev Dewan

    (Department of Decision Sciences, George Mason University, Fairfax, Virginia 22030)

  • Haim Mendelson

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

Abstract

This paper studies optimal pricing and capacity decisions for a service facility in an environment where users' delay cost is important. The model assumes a general nonlinear delay cost structure and incorporates the tradeoff between the delay cost and capacity cost. We find necessary and sufficient conditions for the optimality of a pricing rule that charges out service resources at their marginal capacity cost. We examine the issue of budgetary balance and find that net-value maximization entails a budget deficit for the service facility; that is, the service facility should be evaluated as a "deficit center." The results provide guidelines under which the optimal magnitude of the deficit can be determined.

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormnsc:v:36:y:1990:i:12:p:1502-1517
    DOI: 10.1287/mnsc.36.12.1502
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