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Optimal design of uptime-guarantee contracts under IGFR valuations and convex costs

Hezarkhani, Behzad

Authors

Behzad Hezarkhani



Abstract

© 2016 Elsevier B.V. An uptime-guarantee contract commits a service provider to maintain the functionality of a customer's equipment at least for certain fraction of working time during a contracted period. This paper addresses the optimal design of uptime-guarantee contracts for the service provider when the customer's valuation of a contract with a given guaranteed uptime level has an Increasing Generalized Failure Rate (IGFR) distribution. We first consider the case where the service provider proposes only one contract and characterize the optimal contract in terms of price as well as guaranteed uptime level assuming that the service provider's cost function is convex. In the second part, the case where the service provider offers a menu of contracts is considered. Given the guaranteed uptime levels of different contracts in the menu, we calculate the corresponding optimal prices. We also give the necessary and sufficient conditions for the existence of optimal contract menus with positive expected profits.

Citation

Hezarkhani, B. (2017). Optimal design of uptime-guarantee contracts under IGFR valuations and convex costs. European Journal of Operational Research, 256(2), 556-566. https://doi.org/10.1016/j.ejor.2016.06.032

Journal Article Type Article
Acceptance Date Jun 14, 2016
Online Publication Date Jun 16, 2016
Publication Date Jan 16, 2017
Deposit Date Sep 16, 2016
Publicly Available Date Jun 17, 2018
Journal European Journal of Operational Research
Print ISSN 0377-2217
Electronic ISSN 0377-2217
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 256
Issue 2
Pages 556-566
DOI https://doi.org/10.1016/j.ejor.2016.06.032
Keywords Revenue management; Pricing; Game theory; Maintenance; Contracts; Servitization
Public URL http://eprints.nottingham.ac.uk/id/eprint/36958
Publisher URL http://www.sciencedirect.com/science/article/pii/S0377221716304520
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0
Additional Information Highlights:

Model agents decision making problems under uptime-guarantee maintenance contracts.

Optimize provider’s expected profit due to single contracts under IGFR valuation.

Maximize profit due to contract menus under convex costs and IGFR valuations.

Provide necessary and sufficient conditions for the existence of optimal contracts.

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0


optimal design of uptime guarentee.pdf (869 Kb)
PDF

Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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