Price and service competition with maintenance service bundling

Abstract

In many equipment manufacturing industries, firms compete with each other not only on products price, but also on maintenance service. More and more traditional products oriented firms are offering their customers products bundled with maintenance service (P&S bundles). In this study, we examine firms’ incentive to offer customers products bundling with long-term maintenance or repair support service in a duopoly competitive environment. When providing P&S bundles, a firm need to determine the service level (in terms of average response time guarantee for the service in this paper) to offer and needs to build a service facility to handle the maintenance service requirements. Based on the analysis of three sub-game models, we characterize the market conditions in which only one firm, both firms or neither firm will offer P&S bundles. Finally, we analyze the affects of serval market factors on firms’ strategy choices.

Keywords

Service competition / queues / products and service bundles / product differentiation

References

[1] Allon G, Federgruen A. Competition in service industries. Operations Research, 2007, 55(1): 37-55.

[2] Allon G, Federgruen A. Service competition with general queueing facilities. Operations Research, 2008, 56(4): 827-849.

[3] Carbajo J, DeMeza D, Seidmann D J. A strategic motivation for commodity bundling. Journal of Industrial Economics, 1990, 38(3): 283-298.

[4] Chen Y. Equilibrium product bundling. Journal of Business, 1997, 70(1): 85-103.

[5] Chen H, Wan Y. Capacity competition of make-to order firms. Operations Research Letters, 2005, 33(2): 187-194.

[6] Cohen MA, Whang S. Competing in product and service: a product life cycle model. Management Science, 1997, 43(4): 535-545.

[7] Daniel M B. Product differentiation, competition, and international trade. The Canadian Journal of Economics, 2001, 34(4): 1010-1023.

[8] Fan M, Kumara S, Whinston AB. Short-term and long-term competition between providers of shrink-wrap software and software as a service. European Journal of Operational Research, 2009, 196(2): 661-671.

[9] Herrmann A, Huber F, Coulter RH. Product and service bundling decisions and their effects on purchase intention. Pricing Strategy & Practice, 1997, 5(3): 99-104.

[10] Kameshwaran S, Viswanadham N, Desai V. Bundling and pricing of product with after-sales services. International Journal of Operational Research, 2009, 6(1): 92-109.

[11] Kurata H, Nam S. After-sales service competition in a supply chain: Optimization of customer satisfaction level or profit or both?. International Journal of Production Economics, 2010, 127(1): 136-146.

[12] Luski I. On partial equilibrium in a queueing system with two servers. The Review of Economic Studies, 1976, 43(3): 519-525.

[13] Levhari D, Luski I. Duopoly pricing and waiting lines. European Economic Review, 1978, 11(1): 17-35.

[14] Nalebuff B. Bundling as an entry barrier. Quarterly Journal of Economics, 2004, 119(1): 159-187.

[15] Stigler G J. Stigler G J. A Note on Block Booking. The Organization of Industries, 1968, Homewood, Ill.: Irwin

[16] Stremersch S, Tellis GJ. Strategic bundling of products and prices: a new synthesis for marketing. Journal of Marketing, 2002, 66(1): 55-72.

[17] Tan Y, Mookerjee VS. Allocating spending between advertising and information technology in electronic retailing. Management Science, 2005, 51(8): 1236-1249.

[18] Xiao TJ, Yang DQ. Price and service competition of supply chains with risk-averse retailers under demand uncertainty. International Journal of Production Economics, 2008, 114(2): 187-200.

[19] Zhang Z, Tan Y, Dey D. Price competition with service level guarantee in web services. Decision Support System, 2009, 47(2): 93-104.