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Near‐Optimality of Coarse Service Grades for Customer Differentiation in Queueing Systems
Author(s) -
Nazerzadeh Hamid,
Randhawa Ramandeep S.
Publication year - 2018
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12818
Subject(s) - queueing theory , computer science , revenue , service (business) , value (mathematics) , operations research , microeconomics , business , mathematical optimization , marketing , mathematics , economics , computer network , accounting , machine learning
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.