Optimal Price-Lead Time Menus for Queues with Customer Choice: Priorities, Pooling & Strategic Delay

38 Pages Posted: 31 Aug 2013 Last revised: 29 May 2015

See all articles by Philipp Afeche

Philipp Afeche

University of Toronto - Rotman School of Management

Michael Pavlin

Wilfrid Laurier University - School of Business & Economics

Date Written: August 29, 2013

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 two dimensions, their valuations for instant delivery and their delay cost rates. The distinctive feature of our model is that the ranking of customer preferences depends on lead times: patient customers are willing to pay more for long lead times than impatient ones, and vice versa for speedier service. We provide necessary and sufficient conditions, in terms of the capacity, market size, and properties of the valuation-delay cost distribution, for three features of the optimal menu and segmentation: 1. Pooling types with different delay costs into a single class; 2. Pricing out the middle of the delay cost spectrum while serving both ends; and 3. Strategic delay to deliberately inflate lead times.

Keywords: Capacity, Pricing, Queueing, Revenue Maximization

Suggested Citation

Afeche, Philipp and Pavlin, Michael, Optimal Price-Lead Time Menus for Queues with Customer Choice: Priorities, Pooling & Strategic Delay (August 29, 2013). Rotman School of Management Working Paper No. 2318157, Available at SSRN: https://ssrn.com/abstract=2318157 or http://dx.doi.org/10.2139/ssrn.2318157

Philipp Afeche

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-1591 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=philipp.afeche

Michael Pavlin (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA

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