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

Hezarkhani, Behzad

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: https://nottingham-repository.worktribe.com/output/794800
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S0377221716304520
• 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.