User delay costs and internal pricing for a service facility

This paper studies optimal pricing and capacity decisions for a service facility in an environment where users’ delay cost is important. The model assumes a general nonlinear delay cost structure and incorporates the tradeoff between the delay cost and capacity cost. The authors find necessary and sufficient conditions for the optimality of a pricing rule that charges out service resources at their marginal capacity cost. They examine the issue of budgetary balance and find that net-value maximization entails a budget deficit for the service facility; that is, the service facility should be evaluated as a ‘deficit center.’ The results provide guidelines under which the optimal magnitude of the deficit can be determined.