INDUSTRIAL ENGINEERING AND
OPERATIONS RESEARCH
PRESENTS
IEOR SPECIAL SEMINAR
TUESDAY
Operational Benefits of Subscription Services
Ramandeep Randhawa
Abstract
In this talk, we study a monopolistic firm that offers reusable products, or a
service, to price and quality-of-service sensitive customers - a rental firm
can be thought of as the canonical example. Customers' perception of quality is
determined by their likelihood of obtaining the product or service immediately upon
request. We study the alternatives of offering either a subscription option or a
pay-per-use option from a profit-maximizing perspective. In order to do this we
propose a Markovian model of how subscribers generate
requests and use a standard Poisson model for the pay-per-use option. We derive
diffusion limits in the natural asymptotic regime of large markets, which we
use to derive asymptotically valid estimates of the quality-of-service, as well
as the optimal price and capacity levels for both the options. Under the
assumption of exponential demand, we show that using the subscription option is
more profitable for the firm. Further, via a numerical study, we show that this
assumption is not essential for the result to hold. However, we show that it is
not necessarily true that the subscription option dominates the pay-per-use
option on quality-of-service. The firm is able to manage the trade-off between
price and quality-of-service better in the subscription option. Moreover, we
show that the social welfare and the consumer surplus can also be higher in the
subscription option, indicating that both the firm and the consumers can
benefit from the subscription option.
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