Design and Pricing of Discretionary Service Lines

75 Pages Posted: 18 Oct 2017

See all articles by Laurens Debo

Laurens Debo

Dartmouth College - Tuck School of Business

Cuihong Li

University of Connecticut - Department of Operations & Information Management

Date Written: October 17, 2017

Abstract

We study the offering of discretionary services, those for which longer processing times yield higher quality, but also create more system congestion. Facing delay-sensitive customers that are heterogeneous in quality sensitivity, firms offer a service line (i.e., a menu of service variants defined by their duration with associated prices). We characterize the optimal service line design for First In First Out (FIFO) and Shortest Processing Time (SPT) service operations strategies. We find that SPT leads to service variety even without customer heterogeneity and a price schedule that is non-monotone (or even decreasing) in service quality (duration), contrasting with the structure under FIFO. For both strategies, the shortest and the average service duration may increase when customers become more delay sensitive. Finally, compared to the first-best service line design, the second-best solution offers better quality always at the high end, and possibly also at the low end, of the service line.

Keywords: discretionary services, pricing, mechanism design

JEL Classification: D42

Suggested Citation

Debo, Laurens and Li, Cuihong, Design and Pricing of Discretionary Service Lines (October 17, 2017). Tuck School of Business Working Paper No. 3054741; University of Connecticut School of Business Research Paper No. 17-11. Available at SSRN: https://ssrn.com/abstract=3054741 or http://dx.doi.org/10.2139/ssrn.3054741

Laurens Debo (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Cuihong Li

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

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