Designing Professional Services: Pricing and Priorities

Production and Operations Management, Forthcoming

65 Pages Posted: 7 Nov 2018 Last revised: 20 Mar 2023

See all articles by Chenguang (Allen) Wu

Chenguang (Allen) Wu

Hong Kong University of Science and Technology

Chen Jin

National University of Singapore (NUS) - Department of Information Systems and Analytics

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions

Date Written: October 29, 2018

Abstract

We study the optimal design of a professional service in a mixed market of customers with heterogeneous skills and capabilities of using such service. Expert customers can avail of the service on their own, whereas amateur customers find it challenging to deploy the service and can only procure the service through an intermediary who resolves the technical issues. We develop a model that captures the essential trade-offs in such settings: heterogeneity in customer expertise, decentralization between a service provider and intermediary, and congestion due to limited capacity. We analyze how customer expertise differences drive the equilibrium outcomes under various pricing and priority schemes. We find that a sufficient base of amateur customers allows expert customers to “free-ride” under single pricing. Price discrimination can fully allay such free-riding, but it may drive prices downward. Price discrimination also favors expert customers under the First-Come-First-Served (FCFS) policy, but such preference is generally reversed under prioritization. Specifically, prioritizing amateur customers can bring revenue and welfare gains relative to the FCFS policy and a policy that prioritizes expert customers. Our results offer normative guidelines for managing professional services, clarifying regimes for price and priority discrimination, along with revenue and welfare implications.

Keywords: service operations, queuing game, professional service, pricing, priority

Suggested Citation

Wu, Chenguang (Allen) and Jin, Chen and Veeraraghavan, Senthil K., Designing Professional Services: Pricing and Priorities (October 29, 2018). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3274400 or http://dx.doi.org/10.2139/ssrn.3274400

Chenguang (Allen) Wu

Hong Kong University of Science and Technology ( email )

Room 5559A, Academic Building
HongKong University of Science and Technology
Hong Kong
Hong Kong

Chen Jin (Contact Author)

National University of Singapore (NUS) - Department of Information Systems and Analytics ( email )

Singapore

Senthil K. Veeraraghavan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://https://oid.wharton.upenn.edu/profile/senthilv/

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