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Pricing under quality of service uncertainty: Market segmentation via statistical QoS guarantees

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  • Bhargava, Hemant K.
  • Sun, Daewon
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    Abstract

    This article examines how performance-contingent pricing schemes with long-term statistical performance guarantees can be applied to many IT services. We study two forms of performance-contingent pricing, with rebate proportional to failure rate and fixed rebate for below-threshold performance. We show that threshold-performance contingency pricing can increase both profits and fairness (customers who receive higher benefits pay higher effective price) relative to standard pricing. But an even better solution is to offer a menu of performance guarantees: this can increase the firm's profit and segment the market. Only service providers whose performance level is sufficiently better than the industry standard can benefit from this pricing mechanism.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 191 (2008)
    Issue (Month): 3 (December)
    Pages: 1189-1204

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    Handle: RePEc:eee:ejores:v:191:y:2008:i:3:p:1189-1204

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    Web page: http://www.elsevier.com/locate/eor

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    References

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    Cited by:
    1. Arne Katzmarzik, 2011. "Product Differentiation for Software-as-a-Service Providers," Business & Information Systems Engineering, Springer, vol. 3(1), pages 19-31, February.

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