Reliability-constrained pricing, capacity, and quality: an illustration of economic concepts to postal services

Reliability-constrained pricing, capacity, and quality: an illustration of economic concepts to postal services

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Article ID: iaor20001486
Country: United States
Volume: 8
Issue: 1
Start Page Number: 92
End Page Number: 107
Publication Date: Mar 1999
Journal: Production and Operations Management
Authors:
Keywords: public service
Abstract:

A model is developed from which welfare-optimal prices, capacities, and reliabilities for a service provider are simultaneously determined. Solutions are determined under conditions of stochastic demand subject to a reliability constraint on service quality. Both quality of service provided, as well as price, impact on demand for services rendered. Results indicate that (i) optimal prices are equated to the reliability-constrained marginal costs, (ii) optimal reliabilities require that the marginal benefits of increasing reliability are equated to the marginal costs of doing so, and (iii) optimal capacity allocation involves minimizing the system's expected costs subject to meeting the prespecified reliability constraint for service quality. The model is applied to postal delivery services in the light of the growing competition that has emerged in this industry.

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