Effects of Flexible On-Demand Upgrade/Downgrade on Firm’s Pricing and Product Strategies

50 Pages Posted: 20 Sep 2019 Last revised: 2 Jan 2021

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Hongyan Shi

Nanyang Technological University (NTU) - Division of Marketing and International Business

Tianxin Zou

University of Florida - Warrington College of Business Administration

Date Written: January 1, 2021

Abstract

In many markets, consumers have time-varying needs for product or service quality. However, due to the lack of real-time processing capability or the high transaction costs to process consumers’ change requests, firms had not allowed customers to frequently alter their subscribed level of service or product quality to dynamically adjust to their changing needs. With advances in mobile and information technologies as well as in logistical services, the transaction costs for processing these frequent changes have significantly decreased, and more firms are now capable of dynamically altering a customer’s service quality on demand. These firms can allow and efficiently process a customer’s request for short-term (e.g., daily or hourly) product or service upgrade/downgrade. This paper provides an analytical model to examine the effects of a firm’s on-demand product-adjustment capability (OPAC) on its optimal pricing and product-line decisions in a market where consumers have time-varying product needs and different consumer segments have heterogeneous ex ante probabilities of being in a high-need state. We find that OPAC does not always improve the firm’s profit: it does so only when the variation of consumers’ valuations of a product between the two need states is intermediate and each consumer segment is large enough. One may intuit that under OPAC, the firm tends to reduce the optimal quality for the low-end product to convince customers to upgrade from the low-end to the high-end product. Interestingly, we find that OPAC can lead to an increase in quality for both the high-end and low-end products.

Keywords: pricing, micro-transaction, quality, product line, upgrade, micro-payment

JEL Classification: D21, D42, M31

Suggested Citation

Jiang, Baojun and Shi, Hongyan and Zou, Tianxin, Effects of Flexible On-Demand Upgrade/Downgrade on Firm’s Pricing and Product Strategies (January 1, 2021). Available at SSRN: https://ssrn.com/abstract=3456849 or http://dx.doi.org/10.2139/ssrn.3456849

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Hongyan Shi

Nanyang Technological University (NTU) - Division of Marketing and International Business ( email )

BLK S3-B1A-32
50 Nanyang Avenue
Singapore, Singapore 639798
Singapore

Tianxin Zou

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
71
Abstract Views
416
rank
391,681
PlumX Metrics