The effect of discounts on optimal pricing under limited capacity

Abstract

This paper considers the problem of optimal pricing in a system serving two classes of customers differentiated by their delay sensitivities. We derive the revenue maximising pricing policies whether or not price discrimination is an option. We find that in both cases the optimal policy causes the less delay-sensitive class to enter first, and the optimal prices are increasing in capacity under price discrimination, which is not generally true when price discrimination is not allowed. Furthermore, under price discrimination, less capacity is needed to capture a customer class or the entire market, while, more customers are served and higher revenue is generated. Finally, we use an M/M /1 system to provide further insights and numerical analysis.