Customer Incentives in Time-Based Environment

Abstract

In this chapter, we explore customer incentive issues. Time-basedcompetition was first highlighted explicitly in the literature in thelate 1980s by Stalk who argued that time has become a significant sourceof competitive advantage. Since Stalk's introduction of this paradigm,it has attracted a lot of attentions, and its importance apparently hasbeen recognized. In time-based environment, customers have become moreand more sensitive to the range of choices and the degree ofresponsiveness provided by firms. However, production and consumptionhappen simultaneously in service production, which makes waiting inqueue inevitable. Demand management is an effective way to solve thisproblem. Since customers' private information such as delay cost iscritical for demand management, a key question is how a firm can provideincentives to its customers so that it is in their interest totruthfully disclose their information.This chapter seeks to provide a comprehensive review of the literatureand explore further research of customer incentive issues. We begin ourreview of the literature by introduction of some pre-requisiteknowledge, including the objective of the firm and the customer'sutility function. Then we discuss the literature of mechanism design andcategorize the existing literature into two broad classes: price auctionand direct mechanism. In direct mechanism, a customer is required toreport his delay cost when he arrives at the firm. Based on hisannouncement, the firm assigns a priority to him and imposes acorresponding priority toll. Through designing the assignment andpricing rules properly, customers will disclose the truth. There arealso some articles referring to price auction. In their settings,customers should bid for priorities when they arrive. The key of priceauction is to find the equilibrium bid function.Most of the literature discusses the problem of priority assignment,i.e., managing demand in the same period. For service enterprises, it ismore meaningful to assign demand to different periods. In the thirdsection of this chapter, we present a model with several periods eachproviding different value. Actually, heterogeneous service is a mainreason that results in imbalance between demand and supply. We firstobtain the optimal assignment and pricing rules when the firm isomniscient and acts on a centralized administrative basis. Then we provethat this optimal mechanism is also incentive compatible, i.e., themechanism enables the decentralization of decisions while maintainingoptimality. According to the optimal mechanism, high-value periods willserve more customers who are more patient.We then conclude the chapter with an overall summary and the furtherresearch to be carried out in this realm, including models with generaldelay cost structure and perishable value, integrated capacity decisionand real-time decision models.