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Optimal Contract Period for Priority Service

Author

Listed:
  • Hung-Po Chao

    (Electric Power Research Institute, Palo Alto, California)

  • Robert Wilson

    (Stanford University, Stanford, California)

Abstract

In industries with capacity constraints and nonstorable outputs, priority service is a form of market organization in which customers subscribe in advance to the order in which they will be served from scarce supplies. The optimal duration of priority service contracts depends on a tradeoff between transaction costs and efficiency gains that, in turn, depends on the serial correlations of customers' service valuations. Using a stationary Markov process to characterize the distribution of customers' valuations, we present several simple methods that illustrate the principal determinants of the optimal contract period.

Suggested Citation

  • Hung-Po Chao & Robert Wilson, 1990. "Optimal Contract Period for Priority Service," Operations Research, INFORMS, vol. 38(4), pages 598-606, August.
    • Handle: RePEc:inm:oropre:v:38:y:1990:i:4:p:598-606
    DOI: 10.1287/opre.38.4.598
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    Citations

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    Cited by:

    1. Hui-Chih Hung & Chung-Yu Chung & Muh-Cherng Wu & Wan-Ling Shen, 2017. "A membership pricing policy to facilitate service scale-expansion," The Service Industries Journal, Taylor & Francis Journals, vol. 37(3-4), pages 167-189, March.
    2. Jörn Kruse, 2010. "Priority and Internet Quality," Chapters, in: Morten Falch & Jan Markendahl (ed.), Promoting New Telecom Infrastructures, chapter 10, Edward Elgar Publishing.
    3. Qu, Yingge & Kumar, V. & Zhao, Yi, 2023. "A dynamic model of the contract length and early termination: The roles of technology evolution and pricing strategy," Journal of Business Research, Elsevier, vol. 167(C).

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