Service Capacity Management with Time Sensitive Customers

Date of Award

Winter 12-15-2009

Author's School

Graduate School of Arts and Sciences

Author's Department

Business Administration

Additional Affiliations

Olin Business School

Degree Name

Doctor of Philosophy (PhD)

Degree Type



This dissertation studies capacity decisions in a service environment where arrival rates are highly seasonal and customers are time sensitive.

Time sensitive customers may depart without receiving service if the waiting time is too long. We begin by studying a monopolist’s capacity decision, where the key trade-off is between the cost of extra capacity for low demand periods and the loss of revenue for high demand periods. We find that while the optimal capacity is monotonically decreasing in the cost to revenue ratio, it is not always monotone in customers’ patience.

We then study a duopoly model, where customers are assumed to have an initial server preference but may switch from their original choice to their second choice if the waiting time at their favorite server is too long. We find that in most scenarios, delay-time competition neither helps nor hurts the customers and the identical firms. However, if the firms are significantly dissimilar in cost structure then competition can significantly hurt the inefficient firm but benefit both the efficient firm and the customers.

The last part of the dissertation is also concerned with capacity management in service industries with seasonal demand, but focuses on the effect of strategic customers’ behavior on the service provider’s capacity strategy. Due to the seasonality, the firm uses a postponement strategy where compensation is given to unserved peak-period customers who delay service to the off-peak period. However, some off-peak customers are strategic and may pretend to be peak-period customers purely to receive the postponement discount. We provide a model to study the effect of the presence of strategic customers on the service provider’s capacity strategy; we provide the amended capacity decisions for the service provider with consideration of the strategic customers’ behavior. Unsurprisingly, we find that the presence of the strategic customers hurts the service provider. More interestingly, we find that the presence of the strategic customers may benefit the peak-period customers and that, unlike the inventory literature with strategic (forward-looking) customers, in which the supplier’s response is usually detrimental to strategic customers, the strategic customers in our service environment may benefit if the supplier responds to their presence.


English (en)

Chair and Committee

Tava Lennon Olsen

Committee Members

Panos Kouvelis, Stephanie Lau, Nan Lin, Fuqiang Zhang, Guofu Zhou


Permanent URL: https://doi.org/10.7936/K7NS0RSG

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