Integrated pricing and capacity decision for a telecommunication service provider

Abstract

This paper studies a price and capacity decision for a telecommunications service provider that differentiates its products based on price and quality of service to maximize revenue. We assume the market is segmented into two customer classes. Time sensitive customers are willing to pay a price premium for a shorter service time, while price sensitive customers are willing to accept a longer service time in return for a lower price. The service provider offers products and services that differ only in their guaranteed service times and prices. We first develop a mathematical model to determine the optimal product price and optimal capacity necessary for maximizing total profit. We then consider a case where a service provider can marginally increase or decrease the capacity, and compute the optimal price and optimal capacity.