Dynamic control of an M/M/1 service system with adjustable arrival and service rates

Dynamic control of an M/M/1 service system with adjustable arrival and service rates

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Article ID: iaor20081218
Country: United States
Volume: 52
Issue: 11
Start Page Number: 1778
End Page Number: 1791
Publication Date: Nov 2006
Journal: Management Science
Authors: ,
Keywords: control
Abstract:

We study a service facility in which the system manager dynamically controls the arrival and service rates to maximize the long-run average value generated. We initially consider a rate-setting problem where the service facility is modeled as an M/M/1 queue with adjustable arrival and service rates and solve this problem explicitly. Next, we use this solution to study a price-setting problem, where customers are utility maximizing and price- and delay-sensitive, and the system manager chooses state-dependent service rates and prices. We find that the optimal arrival rate is decreasing and the optimal service rate is increasing in the number of customers in the system; however, the optimal price need not be monotone. We also show that under the optimal policy, the service facility operates as one with a finite buffer. Finally, we study a numerical example to compare the social welfare achieved using a dynamic policy to that achieved using static policies and show the dynamic policy offers significant welfare gains.

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