Pricing Ancillary Service Subscriptions

53 Pages Posted: 24 Oct 2015 Last revised: 10 Jul 2018

See all articles by Ruxian Wang

Ruxian Wang

Johns Hopkins University - Carey Business School

Maqbool Dada

Johns Hopkins University - Carey Business School

Ozge Sahin

Johns Hopkins University - Carey Business School

Date Written: July 10, 2018

Abstract

We investigate heterogeneous customer choice behavior in the presence of main products, ancillary services with options of pay-per-use and subscription, as well as the outside option. The willingness to pay for service subscription is derived as a closed-form expression, which enables us to characterize the optimal pricing strategy and the impact of service subscription on customer surplus. Analytical results and numerical experiments show that offering service subscriptions may result in “win-win”, “win-win-win”, “win-win-lose”, “lose-lose-win” and other situations for the firm, competitors and customers in a variety of monopolistic and duopolistic scenarios. The advantages of service subscription remain with heterogeneous customers differing on multiple dimensions, e.g., the nominal utility, uncertainty in the need of ancillary service and purchase frequency. We find that if the product quality for both firms, measured by nominal utility, is not significantly different, more fierce price competition by offering service subscription may result in higher customer surplus, compared to that without service subscription. Ancillary service subscription can help firms to better price-discriminate heterogeneous customers through different subscription decisions and subsequent purchase behavior.

Keywords: Revenue Management; Pricing; Ancillary Service; Subscription; Choice Model

Suggested Citation

Wang, Ruxian and Dada, Maqbool and Sahin, Ozge, Pricing Ancillary Service Subscriptions (July 10, 2018). Management Science, Forthcoming; Johns Hopkins Carey Business School Research Paper No. 17-06 . Available at SSRN: https://ssrn.com/abstract=2671923 or http://dx.doi.org/10.2139/ssrn.2671923

Ruxian Wang (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Maqbool Dada

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Ozge Sahin

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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