Priority Pricing for Profit Maximization Given Strategic, Delay-Sensitive Customers with a Continuum of Types

Carnegie Mellon University, Pittsburgh PA

Investigators

Abstract

The research objective of this award is to study a service provider facing an arrival stream of delay-sensitive, strategic customers. The "type" of a customer consists of her valuation for service and her delay sensitivity (waiting cost). While the distribution of customer types may be known, or partially known, an individual's customer type is not known. The research approach is to study a continuum of customer valuations (rather than a finite number), enabling the analysis of infinitely many price/delay combinations. The deliverables of this research will include a revenue-maximizing incentive-compatible menu of prices, where a customer pays a higher price to receive higher queuing priority, and hence lower delay. Additionally the research will deliver modeling and analysis tools and revenue and welfare comparisons under different customer types. If successful, this research will solve a timely problem: how to allocate and price service priority to customers, where the customers are heterogeneous in their valuations (available funds)and in their delay sensitivities and are willing to lie about these. The award will produce simple closed-form optimal price menus that charge different prices for different priority levels, so as to optimize profit for the service provider. The research is made possible by a combination of two very different research areas: incentive-compatible pricing and queuing theory and contributes to a long-term ongoing international collaboration in pricing and queuing between Carnegie Mellon and the TUE/EURANDOM Institute in the Netherlands. The mathematics developed will also help train graduate and undergraduate students as well as Math Olympiad K-12 students in the Western PA ARML team and will contribute to the SWAN program on optimal adoption placement.