Cachon and Feldman:
Pricing Services Subject to Congestion: Charge Per-Use Fees or Sell Subscriptions?
Manufacturing & Service Operations Management 13(2), pp. 244–260, ©2011 INFORMS
positive per-use pricing scheme—resulting in differ-ent utilizations of the server. Hence, in our model thetwo schemes are not equivalent.Our subscription pricing scheme resembles ad-vance-purchase pricing (e.g., DeGraba 1995, Xie andShugan 2001). When consumers purchase in advanceof the service, such as buying a concert ticket weeks before the event, consumers are willing to pay theirexpected value for the service. In contrast, when con-sumers spot purchase, i.e., when they know theirvalue for the service, they are naturally willing topay only their realized value. When purchasing inadvance, consumers are more homogeneous relativeto the spot market, so the ﬁrm can earn more rev-enue by selling in advance than by selling just witha spot price: it can be better to sell in advance toevery customer at their expected value than to sell inthe spot market to a portion of consumers (i.e., thoseconsumers with a high realized value). In our model,subscriptions also have this ability to extract rents because consumers are more homogeneous whenthey purchase subscriptions than when they purchaseon a per-use basis. However, we consider the impactof congestion, whereas the advance-purchase modelsdo not (i.e., consumers in those models do not regu-late their usage based on the pricing policy).
2. Model Description
A single ﬁrm provides a service to a market with apotential number of
homogeneous customers. Con-sumers are assumed to be inﬁnitesimal—i.e., everyconsumer is small relative to the size of the mar-ket. Each customer ﬁnds the service to be valuableon multiple occasions, or service opportunities. Forexample, a customer may wish to occasionally use ateller at her bank, use the Internet repeatedly, or renta movie at least a couple of times per month. Thisstream of service opportunities occurs for each cus-tomer at rate
. At the moment a service opportunityoccurs, a customer observes the value, or utility,
,she would receive if she were to receive the serviceto satisfy that opportunity. Service values for eachcustomer are independent and identically distributedacross opportunities, where the support of
. Hence, we have a single market seg-ment of consumers, so differences between per-useand subscription pricing are not driven by a desireto price discriminate between segments, in contrast toEssegaier et al. (2002). We discuss multiple customersegments in §5.Although customers value receiving the service,they prefer as fast a service process as possible—eachcustomer incurs a cost
per unit of time to completeservice (time waiting and in service).
Finally, con-sumers neither receive utility nor incur disutilitywhen not in the service process and waiting for thenext service opportunity to arise.The ﬁrm offers one of two pricing schemes: a per-use fee or a subscription price. The per-use fee,
, is acharge for each service completion: e.g., a fee for with-drawing money from an automatic teller machine, afee for each visit to a health club, or a per-minute feefor accessing a database. A subscription price,
, isa fee per unit of time, which is independent of theamount of service the customer receives. (This deﬁni-tion of a subscription is equivalent to a ﬁxed fee,
,for a ﬁnite duration,
, with unlimited usage duringthat time, where
.) Where useful, we use “
” subscripts to signify notation associated withthe per-use and subscription schemes, respectively.The server’s processing rate is
. In §3 we assume
is exogenous, whereas in §4 the ﬁrm chooses
sub- ject to a fee that is proportional to the service rate.
is the expected service time. We use the term
to refer to the total time to complete theservice, i.e., it includes time waiting and in service.We assume that
is sufﬁciently small relative to1
is the maximum possible arrivalrate of service opportunities (i.e., the arrival rate whenevery customer seeks service at every service oppor-tunity). This implies that a customer’s informationabout the queue length during one service occasionis of little use in predicting the waiting time for thenext service encounter. It also implies that for a ﬁxedpotential arrival rate of service,
, the potential pop-ulation of customers,
, is large, they do not seekservice too frequently (
is small), and capacity issufﬁciently large that
. (For example,the interarrival time of services could be measuredin days, whereas service times could be measured inminutes.) Consequently, the arrival rate to the ﬁrm’squeue does not vary (approximately) with the queuelength (which is typically assumed in the queueingliterature), and there is little chance that a serviceopportunity arises while a customer is in the ser-vice process. For example, a customer does not receiveanother need to withdraw cash from an automaticteller machine while she is in the process of with-drawing cash. (See Randhawa and Kumar 2008 fora model of a closed queueing system in which thearrival rate to the queue depends on the number ofcustomers in queue.) Therefore, the expected servicetime depends only on the actual arrival rate,
is strictly increasing (
0) andconvex (
As in Afèche and Mendelson (2004), it is possible to allow thewaiting cost to be linear in the value of the service,
.A detailed analysis is available from the authors.
I N F O R M S
h o l d s
c o p y r i g h t
t o t h i s a r t i c l e a n d d i s t r i b u t e d t h i s c o p y a s a c o u r t e s y t o t h e a u t h o r ( s ) . A d d i t i o n a l i n f o r m a t i o n , i n c l u d i n g r i g h t s a n d p e r m i s s i o n p o l i c i e s , i s a v a i l a b l e a t h t t p : / / j o u r n a l s . i n f o r m s . o r g / .