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

  • Bhargava, Hemant K.
  • Sun, Daewon
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    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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    File URL: http://www.sciencedirect.com/science/article/B6VCT-4P7FSCX-3/1/52e17698a99418d2c145b39f5fef33dd
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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