Customer Incentives in Time-Based Environment

Abstract

In this chapter, we explore customer incentive issues. Time-based competition was first highlighted explicitly in the literature in the late 1980s by Stalk who argued that time has become a significant source of competitive advantage. Since Stalk’s introduction of this paradigm, it has attracted a lot of attentions, and its importance apparently has been recognized. In time-based environment, customers have become more and more sensitive to the range of choices and the degree of responsiveness provided by firms. However, production and consumption happen simultaneously in service production, which makes waiting in queue inevitable. Demand management is an effective way to solve this problem. Since customers’ private information such as delay cost is critical for demand management, a key question is how a firm can provide incentives to its customers so that it is in their interest to truthfully disclose their information.

This chapter seeks to provide a comprehensive review of the literature and explore further research of customer incentive issues. We begin our review of the literature by introduction of some pre-requisite knowledge, including the objective of the firm and the customer’s utility function. Then we discuss the literature of mechanism design and categorize the existing literature into two broad classes: price auction and direct mechanism. In direct mechanism, a customer is required to report his delay cost when he arrives at the firm. Based on his announcement, the firm assigns a priority to him and imposes a corresponding priority toll. Through designing the assignment and pricing rules properly, customers will disclose the truth. There are also some articles referring to price auction. In their settings, customers should bid for priorities when they arrive. The key of price auction is to find the equilibrium bid function.

Most of the literature discusses the problem of priority assignment, i.e., managing demand in the same period. For service enterprises, it is more meaningful to assign demand to different periods. In the third section of this chapter, we present a model with several periods each providing different value. Actually, heterogeneous service is a main reason that results in imbalance between demand and supply. We first obtain the optimal assignment and pricing rules when the firm is omniscient and acts on a centralized administrative basis. Then we prove that this optimal mechanism is also incentive compatible, i.e., the mechanism enables the decentralization of decisions while maintaining optimality. According to the optimal mechanism, high-value periods will serve more customers who are more patient.

We then conclude the chapter with an overall summary and the further research to be carried out in this realm, including models with general delay cost structure and perishable value, integrated capacity decision and real-time decision models.