Miguel Sousa Lobo
Associate Professor of Decision Sciences
Non-profit firms sometimes engage in for-profit activities with the purpose of generating revenue to subsidize their mission activities. The organization is then confronted with a consumption vs. investment tradeoff, where investment corresponds to providing capacity for revenue customers, and consumption corresponds to serving mission customers.This approach is exemplified by the Aravind Eye Hospitals in India, where profitable paying hospitals are used to subsidize care at free hospitals.The authors model this problem as a multi-period stochastic dynamic program. In each period, the organization must decide how much of the current assets should be invested in revenue-customer service capacity and at what price the service should be sold.The authors provide sufficient conditions under which the optimal capacity and pricing decisions are of threshold type. Similar results are derived when the selling price is fixed but the banking of assets from one period to the next is allowed.The authors compare the performance of the optimal threshold policy with heuristics which may be more appealing to managers of non-profit organizations, and assess the value of banking and dynamic pricing through numerical experiments.