Service Revenue Management in the Presence of Grouping Complementarities

Abstract

This thesis studies a revenue management problem faced by providers of differentiated and congested services when customer preferences are subject to externalities. In particular, a customer benefits not only from receiving the offered service, but also from participating in the service with other customers. The provider offers multiple services differentiated by a measurable attribute and customers have idiosyncratic preferences for this attribute. The preference to conform around a particular offered service can nonetheless, cause congestion as customers systematically avoid less popular options. Such congestion increases the marginal cost of serving a customer. For this setting, we address the following questions: When can product differentiation reduce the congestion in the system? If the service provider can differentiate customers, what is the optimal level of differentiation? When is the optimal level of differentiation a Nash equilibrium and when is that Nash equilibrium stable (i.e. not disrupted by a deviation by a small number of customers)? We consider first a simple model where idiosyncratic customer preferences are uniformly distributed on a determined interval and the provider places up to two differentiated services. We then consider more general settings including allowing arbitrary customer distributions, increasing the number of possible differentiated services and associating provider revenue with the differentiation attribute. The model was initially motivated by a problem in the gaming industry but extends to many other types of service providers where customers have similar attributes such as online video games and other entertainment settings.