Near-Optimality of Coarse Service Grades for Customer Differentiation in Queueing Systems

28 Pages Posted: 19 May 2014 Last revised: 26 Mar 2015

Hamid Nazerzadeh

University of Southern California - Marshall School of Business

Ramandeep S. Randhawa

University of Southern California

Date Written: March 25, 2015

Abstract

We analyze a service firm that caters to price and delay sensitive customers who are differentiated on both their value for the service and the cost of waiting. There is a continuum of customer types in our setting and we model each customer's cost of waiting to be linear in the delay incurred with a multiplier that is an increasing linear or sub-linear function of the customer's value for the service. Using a large system approach, we characterize the firm's revenue maximizing menu of price and delay quotations and the value of customer differentiation. We further characterize the value of offering coarse or few service grades and find that offering two service grades is asymptotically optimal on the typical square-root scale, relative to the optimal policy.

JEL Classification: D4

Suggested Citation

Nazerzadeh, Hamid and Randhawa, Ramandeep S., Near-Optimality of Coarse Service Grades for Customer Differentiation in Queueing Systems (March 25, 2015). Available at SSRN: https://ssrn.com/abstract=2438300 or http://dx.doi.org/10.2139/ssrn.2438300

Hamid Nazerzadeh (Contact Author)

University of Southern California - Marshall School of Business ( email )

Bridge Memorial Hall
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~nazerzad/

Ramandeep S. Randhawa

University of Southern California ( email )

Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States

Paper statistics

Downloads
266
Rank
92,964
Abstract Views
831