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Optimal Price/Lead-Time Menus for Queues with Customer Choice: Segmentation, Pooling, and Strategic Delay

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  • Philipp Afèche

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

  • J. Michael Pavlin

    (School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario N2L 3C5, Canada)

Abstract

How should a firm design a price/lead-time menu and scheduling policy to maximize revenues from heterogeneous time-sensitive customers with private information about their preferences? We consider a queueing system with multiple customer types that differ in their valuations for instant delivery and their delay costs. The distinctive feature of our model is that the ranking of customer preferences depends on lead times: patient customers are willing to pay more than impatient customers for long lead times, and vice versa for speedier service. We provide necessary and sufficient conditions, in terms of the capacity, the market size, and the properties of the valuation-delay cost distribution, for three features of the optimal menu and segmentation: pricing out the middle of the delay cost spectrum while serving both ends, pooling types with different delay costs into a single class, and strategic delay to deliberately inflate lead times. This paper was accepted by Assaf Zeevi, stochastic models and simulation .

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:8:p:2412-2436
    DOI: 10.1287/mnsc.2015.2236
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    15. Hossein Abouee‐Mehrizi & Ata Ghareaghaji Zare & Renata A. Konrad, 2022. "Pricing in Service Systems with Rational Balking and Abandonment of Time‐Sensitive Customers," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 495-510, February.
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    17. Terry A. Taylor, 2018. "On-Demand Service Platforms," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 704-720, October.
    18. Benioudakis, Myron & Burnetas, Apostolos & Ioannou, George, 2021. "Lead-time quotations in unobservable make-to-order systems with strategic customers: Risk aversion, load control and profit maximization," European Journal of Operational Research, Elsevier, vol. 289(1), pages 165-176.
    19. Chamberlain, Jonathan & Simhon, Eran & Starobinski, David, 2021. "Preemptible queues with advance reservations: Strategic behavior and revenue management," European Journal of Operational Research, Elsevier, vol. 293(2), pages 561-578.
    20. Pavlin, J. Michael, 2017. "Dual bounds of a service level assignment problem with applications to efficient pricing," European Journal of Operational Research, Elsevier, vol. 262(1), pages 239-250.
    21. Chen-An Lin & Kevin Shang & Peng Sun, 2023. "Wait Time–Based Pricing for Queues with Customer-Chosen Service Times," Management Science, INFORMS, vol. 69(4), pages 2127-2146, April.
    22. 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.
    23. 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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