Stochastic choice hazard and incentives in a common service facility

This paper examines the pricing and incentives in an M/G/1 queue. A setting wherein two division managers share a common production facility and decide on the demand (usage) rates is developed. Stochastic choice hazard created by the unobservability of demand rates chosen by the division managers leads to incentive issues. Specifically, the headquarters needs to design incentive schemes such that the use of the common facility is optimal for the firm. When the incentive schemes are based on divisional performance measures, a charge based on usage ensures firm-wide efficient use of the common facility as a unique equilibrium. The charge is such that it encourages use of the facility when a division's expected benefit increases. Increases in the capacity of the common facility are not shared proportionately by the division managers, and therefore, the charge is not monotone in the capacity of the common facility.