Getting Your Money’s Worth: Capacity Planning Through Admission Control vs. Consumption Control
In many industries, consumers who purchase services pay a fixed upfront fee for access, and then consume that service over a period of time. In this paper, we examine the implications of this temporal separation of purchase and consumption on a user's consumption choices, and on the firm's optimal strategy. Through two experimental studies, we first document the impact of the access fee on subsequent consumption choices, and offer evidence that higher access fee, by increasing a user's mental account deficit, increases their propensity to consume the service. Following the empirical demonstration of the positive correlation between access fee and subsequent consumption, we develop a micro-founded model of user's decision calculus that is then used to analyze the firm's optimal pricing and service quality decisions. In contrast to the classical recommendation to pursue admission control through higher prices as a means to manage capacity, we find that it is sometimes optimal for a firm to pursue consumption control through lower prices. This difference in the firm's optimal strategy occurs because of two inter-related yet opposing effects of the firm's access fee on the demand for its service capacity. While the higher access fee reduces the number of consumers who ex-ante purchases the service, the incentive to derive higher value from their purchase induced by consumption bias can also ex-post increase the overall consumption of the service, and thus worsen congestion. When the quality of the service is endogenized, a combination of consumption control through lower access fees, and admission control through quality throttling becomes the optimal strategy. We also find that access fees of competing service providers are strategic complements when the bias is low, but become strategic substitutes when the bias is high. As a result, firms have to balance the requirement to control consumption with the need to compete effectively, and thus adjust their pricing strategy also on basis of the consumption bias experienced by their rivals.
services, congestion, admission control, consumption control, subscriptions, mental accounting bias
Business Administration, Management, and Operations
SMU Cox: IT & Operations Management (Topic)