Is Full Price the Full Story When Consumers Have Time and Budget Constraints?
Manufacturing & Service Operations Management
45 Pages Posted: 28 Sep 2022 Last revised: 19 Sep 2023
Date Written: July 22, 2022
Problem definition: A canonical model in service management assumes that consumers base the purchase of a service on its full price, i.e., a linear combination of the monetary price and the expected time commitment. While analytically convenient, when this assumption holds is an unexplored question. Methodology/results: We present a model of consumers allocating their time and money between working, overhead activities that do not provide utility, one continuous leisure activity, and one discrete service. Both continuous leisure activity and discrete service increase utility. Consumers can allocate any non-negative amount of time or money to the leisure activity. Consumption of the discrete service requires a specific amount of time and money. We examine when the decision to purchase the discrete service depends only on its full price. We show that the full-price assumption does hold—in specific cases. To be precise, it depends on how consumers are paid. If consumers completely control the amount of time they work and earn a constant wage, they base their purchase decision on the full price. If, however, they must work a fixed shift length, the assumption fails and the full price is not sufficient to determine the consumer’s action. This leads to systematic differences in seller’s strategies when they serve consumers with different compensation structures. If the consumers must work longer than would be optimal if they controlled their schedule and earned the same hourly wage, i.e., the consumers are overemployed shift workers, a seller restricts sales (relative to selling to consumers who control their work hours) and the system is less congested. The reverse holds if the consumers would prefer to work longer at the offered wage; i.e., the consumers are underemployed shift workers. Managerial implications: We show that sellers who fail to take prevailing compensation structures of the community they serve into consideration experience significant revenue loss. In some cases, we see losses in consumer surplus and social welfare as well.
Keywords: service operations, pricing and revenue management, economic models
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