Ramarao Desiraju & Steven M . Shugan Strategic Service Pricing and Yield Management

Service sectori growth (e.g., Shugan 1994) and its study suggest that service providers frequently face special problems (e.g., Johnson 1964; Radas and Shugan 1998a, b; Rust, Zahorik, and Keiningham 1995). One such problem is perishability (Parasuraman and Varadarajan 1988). When planes, trains, or ships depart, for example, unused seats are lost forever. Similar problems occur for vacant hotel rooms, unsold concert tickets, idle tables at restaurants, and many other fixed-capacity services. Linked to the perishability problem is a capacity-constraint problem. When demand peaks, many services face binding capacity constraints that prevent serving additional customers. For example, car rental agencies have a limited number of cars at each location, hotels have a limited number of rooms, and repair shops have a limited number of mechanics. Indeed, nearly all service providers face some form of capacity constraint.^ The combination of perishability and capacity constraints can encourage a business orientation in which service providers focus on filling capacity (Wardell 1989). For example, Amtrak states, "We don't want empty seats" (Wilder 1991). However, as Heuslein (1993, p. 178) reminds us, "Filling up empty seats with discount fares doesn't help if packed planes are still flying at a loss." To profitably fill capacity, many service providers use complex pricing systems administered by a computer. Such systems, referred to as yield management systems (YMS), employ techniques such as discounting early purchases, lim-