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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

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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  • Bhargava, Hemant K. & Sun, Daewon, 2008. "Pricing under quality of service uncertainty: Market segmentation via statistical QoS guarantees," European Journal of Operational Research, Elsevier, vol. 191(3), pages 1189-1204, December.
  • Handle: RePEc:eee:ejores:v:191:y:2008:i:3:p:1189-1204
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    Cited by:

    1. Goode, Sigi & Lin, Chinho & Fernandez, Walter & Jiang, James J., 2014. "Exploring two explanations of loyalty in application service provision," European Journal of Operational Research, Elsevier, vol. 237(2), pages 649-657.
    2. Arne Katzmarzik, 2011. "Product Differentiation for Software-as-a-Service Providers," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 3(1), pages 19-31, February.
    3. Tiaojun Xiao & Tsan Ming Choi & Danqin Yang & T. C. E. Cheng, 2012. "Service Commitment Strategy and Pricing Decisions in Retail Supply Chains with Risk-Averse Players," Service Science, INFORMS, vol. 4(3), pages 236-252, September.
    4. Li, Yung-Ming & Lee, Yi-Lin, 2010. "Pricing peer-produced services: Quality, capacity, and competition issues," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1658-1668, December.
    5. repec:pal:jorsoc:v:68:y:2017:i:9:d:10.1057_s41274-016-0141-z is not listed on IDEAS

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