Pricing and Capacity Allocation for Shared Services

We study the pricing and capacity allocation problem of a service provider who serves two distinct customer classes. Customers in each class are inherently heterogeneous in their willingness to pay for service, but their utilities are also affected by the presence of other customers in the system. Specifically, customer utilities depend on how many customers are in the system at the time of service as well as who these other customers are. We find that if the service provider can price discriminate between customer classes, pricing out a class, i.e., operating an exclusive system, can sometimes be optimal and depends only on classes’ perceptions of each other. If the provider must charge a single price, an exclusive system is even more likely. We extend our analysis to a service provider who can prevent class interaction by allocating separate capacity segments to the two customer classes. Under price discrimination, allocating capacity is optimal if the “net appreciation” between classes, as defined in the paper, is negative. However, under a single-price policy, allocating capacity can be optimal even if this net appreciation is positive. We describe in detail how the nature of asymmetry in classes’ perception of each other determines the optimal strategy. The online appendix is available at https://doi.org/10.1287/msom.2016.0606 .