Lead-Time Quotations in Unobservable Make-To-Order Systems with Strategic Customers: Risk Aversion, Load Control and Profit Maximization

TL;DR

This paper models how a make-to-order system with strategic, risk-averse customers determines pricing, lead-time quotations, and compensation policies, analyzing their effects on customer behavior and provider profit under various constraints.

Contribution

It introduces a comprehensive model incorporating risk aversion, strategic customer behavior, and flexible pricing and compensation strategies in make-to-order systems.

Findings

Lead-time and compensation options enable higher entrance fees.

Customer risk aversion significantly influences join/balk decisions.

Providers can manipulate input rates through pricing and compensation strategies.

Abstract

We develop a model for pricing, lead-time quotation and delay compensation in a Markovian make-to-order production or service system with strategic customers who exhibit risk aversion. Based on a concave utility function of their net benefit, customers make individual decisions to join the system or balk without observing the state of the queue. The decisions of arriving customers result in a symmetric join/balk game. Regarding the firm's strategy, the provider announces a fixed entrance fee, a lead-time quotation and a compensation rate for the part of a customer delay which exceeds the quoted lead-time. We analyze the effect of customer risk aversion and the compensation policy on the equilibrium join/balk strategies and the resulting input rates, and assess the flexibility of the provider in inducing a range of possible input rates under various constraints on the pricing/compensation policy. In numerical experiments we explore the behavior of pricing curves that reflect the provider's choices in inducing specific input rates. A key insight obtained from the analysis is that a main benefit of the lead-time and compensation option is to allow the entrance fee to remain high and the provider prefers strategies that lead to this direction.