The optimal decision of service provider considering extra waiting area value-added services – pooled or dedicated?

Abstract

Service providers often provide chargeable extra waiting area value-added services (EWS) to enhance customers’ waiting experiences, e.g., in VIP and business lounges at airports, train stations, luxury brand stores, etc., to improve profitability. The impact of EWS on customers’ value perception is subject to their heterogeneous sensitivities and also depends on the reference effect due to EWS’ observable status. This paper investigates the optimal level of EWS and price decisions for a service provider facing heterogeneous customers, namely the EWS-preferring (E-type) customers and ordinary (O-type) customers, considering the observable status (observable vs. unobservable) of EWS using pooled or dedicated capacities in operations through M/M/1 queue models. The optimal price and level are solved and the optimal profit is calculated under each scenario. It is found that customers’ heterogeneous sensitivities play an important role in the price and intensity decisions. Offering observable EWS to leverage the reference effect in customers’ value perception can lead to a higher profit. Furthermore, using pooled capacity in operations with EWS is more profitable when service costs are higher. These results offer significant managerial implications and provide practical guidelines for service providers regarding the intensity of EWS, service price, and whether EWS should be observable to customers through pooled or dedicated capacities.