Group Service or Individual Service? Differentiated Pricing for a Private or Public Service Provider

Abstract

Facilitated by information technology and online platforms, group service has emerged in many service systems, such as one-to-many tour guide service, one-to-many tutoring courses and one-to-many medical diagnosis. We consider a service provider offering both group service and individual service and model it as a single-server queue in which customers with heterogeneous waiting costs make both joining/balking and group/individual service decisions. We solve the private provider’s service assortment and pricing strategies for profit maximization (system C), whose solution leads to six equilibrium structures. Furthermore, both equilibrium service volume and service price are nonmonotonic in the potential arrival rate, which contradicts classical theory due to the follow-the-crowd (FTC) characteristics associated with group service. This leads to a counterintuitive and novel pricing implication: sustaining full coverage in a larger market may necessitate an increase in service prices when group service is offered. We then numerically show that the optimal group size is unique. Furthermore, compared with scenarios where only individual service is provided, the simultaneous provision of both services can create a win-win-win situation, particularly when the potential arrival rate is relatively high. We extend the discussion to the scenario with a welfare-maximizing objective (system S) and show that the aforementioned results continue to hold. Furthermore, we find that the socially optimal price is lower than the profit-maximizing price, resulting in a larger total number of customers served in system S. Notably, our findings suggest that system S is more likely to provide group service and achieve full market coverage than system C.