Priority Pricing in Queues with a Continuous Distribution of Customer Valuations (CMU-CS-13-109) (original) (raw)
We consider a service provider facing a continuum of delay-sensitive strategic customers. The service provider maximizes revenue by charging customers for the privilege of joining an M/G/1 queue and assigning them service priorities. Each customer has a valuation for the service, with a waiting cost per unit time that is proportional to their valuation; customer types are drawn from a continuous distribution and are unobservable to the service provider. We illustrate how to find revenue-maximizing incentive-compatible priority pricing menus, where the firm charges higher prices for higher queueing priority. We show that our proposed priority pricing scheme is optimal across all incentive-compatible pricing policies whenever the customer valuation distribution is regular. We compute the resulting price menus and priority allocations in closed form when customer valuations are drawn from Exponential, Uniform, or Pareto distributions. We find revenues in closed form for the special cas...