Order Admission and Optimal Pricing for Regular Jobs and Big Deals at a Service Company

Abstract

This paper studies optimal pricing and demand management policies for a firm that faces two streams of order types: one is composed of recurring regular jobs with pre-determined prices (exogenous prices) and the other involves big deals that require pricing proposals (endogenous prices). The probability to secure the big deals diminishes with the quoted price. The authors develop and compare optimization models for different demand management settings. Specifically, we consider two distinct strategies: a pure strategy in which the firm commits to bid for deals only and a mixed strategy where the firm switches its allocation of capacity between regular jobs and deals. The authors compare optimal pricing strategies under two demand management strategies that differ in how they allocate capacity across regular jobs and deals, and order acceptance policies that they adopt. The authors observe that the differences between two strategies in terms of pricing and average gain are in accord. Under any given set of systems parameters, one of the strategies leads to both higher prices and average gains. Typically, the preferable strategy depends on the exogenous price of regular orders and the price sensitivity of the deals. The authors conclude that the threshold values for these two parameters are determined primarily by the demand rate of the deals and the service rate of the standard jobs.