Spring 2006 Seminar Series

DATE: Thursday, March 16, 2006
LOCATION: E40-298
TIME: 4:15pm
Reception immediately following in the Philip M. Morse Reading Room, E40-106

SPEAKER:
Costis Maglaras
Philip H. Geier Jr., Associate Professor of Business
Columbia University

TITLE
Economics of Queues

ABSTRACT
Production and service systems are prone to congestion effects due to the inherent variability in the arrival and service delivery processes. For example, such effects would delay the delivery of a manufactured product, result on customers waiting for service when they access a call center, or degrade the quality of a service offered through the Internet. On their side, customers are sensitive to this type of delay. In response, competing manufacturers and service providers offer products and services that are differentiated in terms of their prices and delays to induce higher resource utilization, higher profits, and at times better service and surplus for (at least some of) the customers. This talk focuses on the problem of  optimal design and management of such differentiated products offered to a market with heterogeneous price and delay sensitive customers.

 

We will review a model where the firm is constrained to offer a single version of its good to the market, where the key decision reduces to the selection of an optimal static per-access price. Focusing on large scale systems (in terms of their capacity and potential market size), we will characterize the structure of the revenue maximizing price and the associated equilibrium operating regime that emerges as a result of customer decisions to buy in response to the price and prevailing congestion effects. We will then study the more general case where the firm is allowed to offer a menu of  (price, delay) differentiated products to maximize its revenues. We will offer a crisp set of conditions for when it is optimal for the firm to indeed offer differentiated services, i.e., deviate from the solution described earlier, and characterize the optimal differentiation strategy through the optimal price vector and associated sequencing rule. We will conclude with a discussion of some structural insights gleaned from this analysis and briefly discuss some practical extensions.