State Dependent Pricing with a Queue

Posted: 11 Aug 1999

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Hong Chen

Shanghai Advanced Institute in Finance, Shanghai Jiao Tong University

Date Written: July 1999

Abstract

Existing studies of pricing when customers queue, assume that the firm cannot adjust the price to the state of demand. In most applications this assumption is false. We adapt the classic model of Naor (1969 Econometrica) to allow the firm to adjust the price to the state of demand. In contrast to Naor we find that when customers are homogeneous, the firm's pricing rule maximizes social welfare. However when customers are unobservably heterogenous, the firm's pricing rule does not maximize social welfare. Even when customers are identical apart from the arrival time we find that the firm may not always choose to sell to some customers. This is despite the fact that it is technically and economically feasible to do so. This "excess demand" is interpreted as an option effect. The effects of changes to the basic parameters, on the queue length are presented. With heterogenous customers, nonlinearities in the pricing schedules play an important role.

JEL Classification: L1

Suggested Citation

Frank, Murray Z. and Chen, Hong, State Dependent Pricing with a Queue (July 1999). Available at SSRN: https://ssrn.com/abstract=171600

Murray Z. Frank (Contact Author)

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Hong Chen

Shanghai Advanced Institute in Finance, Shanghai Jiao Tong University ( email )

Shanghai, 200052
China

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