Design and Pricing of Discretionary Service Lines
75 Pages Posted: 18 Oct 2017
Date Written: October 17, 2017
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: Suggested Citation