Abstract

http://ssrn.com/abstract=2386361
 


 



Serving Heterogeneous Buyers Through Price and Effort Differentiation


Hao Zhang


UBC Sauder School of Business

Guangwen Kong


University of Southern California - Marshall School of Business

Sampath Rajagopalan


University of Southern California - Marshall School of Business

January 21, 2014


Abstract:     
We investigate the performance of three commonly used pricing schemes — fixed fee, time based contract, and two-part tariff — in service contexts where the buyer’s valuation is invisible to the seller and the seller’s effort may or may not be visible to the buyer even though the buyer is charged based on effort instead of realized quality. We show that the seller’s profit is the same under private or public effort in the case of fixed fee or two-part tariff. Under time based contract, the seller may be better (worse) off in keeping effort private than making it public when the cost of providing service is low (high); the trade-off is also affected by the degree of quality uncertainty in a non-monotonic way. We also find that time based contract can do as well as two-part tariff over a sizable parameter regime when effort is private.

Number of Pages in PDF File: 50

Keywords: Pricing, Services, Private Information

JEL Classification: D82, L14, L15

working papers series





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Date posted: January 29, 2014  

Suggested Citation

Zhang, Hao and Kong, Guangwen and Rajagopalan, Sampath, Serving Heterogeneous Buyers Through Price and Effort Differentiation (January 21, 2014). Available at SSRN: http://ssrn.com/abstract=2386361 or http://dx.doi.org/10.2139/ssrn.2386361

Contact Information

Hao Zhang
UBC Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
Guangwen Kong
University of Southern California - Marshall School of Business ( email )
701 Exposition Blvd
Los Angeles, CA 90089
United States
Sampath Rajagopalan (Contact Author)
University of Southern California - Marshall School of Business ( email )
701 Exposition Blvd
Los Angeles, CA 90089
United States
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