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User Delay Costs and Internal Pricing for a Service Facility

By Sanjeev Dewan and Haim Mendelson

Abstract

This paper studies optimal pricing and capacity decisions for a service facility in an environment where users' delay cost is important. The model assumes a general nonlinear delay cost structure and incorporates the tradeoff between the delay cost and capacity cost. We find necessary and sufficient conditions for the optimality of a pricing rule that charges out service resources at their marginal capacity cost. We examine the issue of budgetary balance and find that net-value maximization entails a budget deficit for the service facility; that is, the service facility should be evaluated as a "deficit center." The results provide guidelines under which the optimal magnitude of the deficit can be determined.delay cost, pricing, capacity, deficit

DOI identifier: 10.1287/mnsc.36.12.1502
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