Demand Management in Delay-Sensitive Markets

Managing customer demand can be challenging for a facility that services delay-sensitive customers. Attracting a high level of demand will result in long delays, which discourage customers to request service. However, low demand means little profitability for the service facility. Pricing is a known way to effectively manage demand. We determine the optimal pricing strategy for the service facility that encourages the right level of demand and define the characteristics of the customer base that ensure optimality. We expand the pricing model to incorporate different decision-making criteria of customers, which capture their risk preferences and lack of rationality in their behavior. Marketing is another well known approach to manage demand. The service facility has the opportunity to invest in marketing efforts to reach out to more customers and thus expand its customer base. We study how the optimal pricing strategy changes when marketing efforts are employed and notice that operational measures such as service variability play an important role in determining optimal marketing spendings.