Dynamic pricing with service unbundling

In this study, we investigate unbundling when a firm dynamically prices a basic service, while separating the sale of a fixed-price add-on. We characterize the optimal dynamic unbundling pricing policy and investigate its structural properties. We find that the value function with unbundling increas...

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Main Authors: Song, Boqian, Li, Michael Zhi Feng
Other Authors: Nanyang Business School
Format: Article
Language:English
Published: 2020
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Online Access:https://hdl.handle.net/10356/142361
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-1423612023-05-19T07:31:16Z Dynamic pricing with service unbundling Song, Boqian Li, Michael Zhi Feng Nanyang Business School Business::Management Revenue Management Dynamic Pricing In this study, we investigate unbundling when a firm dynamically prices a basic service, while separating the sale of a fixed-price add-on. We characterize the optimal dynamic unbundling pricing policy and investigate its structural properties. We find that the value function with unbundling increases in the degree of dependence between consumers’ reservation prices for basic service and add-on. However, there are no similar monotonicity properties for the optimal price of the basic service. For several families of commonly used joint distributions, we show that the influence of the dependence parameter on the optimal price of the basic service depends on a threshold, which is a function of the dependence parameter. Moreover, the price of the bundled service is higher under unbundling when the add-on price is high, and vice versa. Our model is then compared with the bundling model through a numerical experiment. Among most cases where unbundling outperforms, the degree of dependence is non-negative. It is further revealed that given the non-negativity of dependence, unbundling is worth practicing under the following situations: (i) the variance of the reservation price for the basic service (add-on) is low (high); (ii) the mean of the reservation price for the basic service (add-on) is high (low); (iii) the demand intensity is low; (iv) the capacity of the basic service is high; and (v) the incremental cost of the basic service (add-on) is low (high). Finally, unbundling can improve the firm's expected profit and the consumers’ surplus at the same time. 2020-06-19T07:10:17Z 2020-06-19T07:10:17Z 2018 Journal Article Song, B., & Li, M. Z. F. (2018). Dynamic pricing with service unbundling. Production and Operations Management, 27(7), 1334-1354. doi:10.1111/poms.12871 1059-1478 https://hdl.handle.net/10356/142361 10.1111/poms.12871 2-s2.0-85049778326 7 27 1334 1354 en Production and Operations Management © 2018 Production and Operations Management Society. All rights reserved.
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic Business::Management
Revenue Management
Dynamic Pricing
spellingShingle Business::Management
Revenue Management
Dynamic Pricing
Song, Boqian
Li, Michael Zhi Feng
Dynamic pricing with service unbundling
description In this study, we investigate unbundling when a firm dynamically prices a basic service, while separating the sale of a fixed-price add-on. We characterize the optimal dynamic unbundling pricing policy and investigate its structural properties. We find that the value function with unbundling increases in the degree of dependence between consumers’ reservation prices for basic service and add-on. However, there are no similar monotonicity properties for the optimal price of the basic service. For several families of commonly used joint distributions, we show that the influence of the dependence parameter on the optimal price of the basic service depends on a threshold, which is a function of the dependence parameter. Moreover, the price of the bundled service is higher under unbundling when the add-on price is high, and vice versa. Our model is then compared with the bundling model through a numerical experiment. Among most cases where unbundling outperforms, the degree of dependence is non-negative. It is further revealed that given the non-negativity of dependence, unbundling is worth practicing under the following situations: (i) the variance of the reservation price for the basic service (add-on) is low (high); (ii) the mean of the reservation price for the basic service (add-on) is high (low); (iii) the demand intensity is low; (iv) the capacity of the basic service is high; and (v) the incremental cost of the basic service (add-on) is low (high). Finally, unbundling can improve the firm's expected profit and the consumers’ surplus at the same time.
author2 Nanyang Business School
author_facet Nanyang Business School
Song, Boqian
Li, Michael Zhi Feng
format Article
author Song, Boqian
Li, Michael Zhi Feng
author_sort Song, Boqian
title Dynamic pricing with service unbundling
title_short Dynamic pricing with service unbundling
title_full Dynamic pricing with service unbundling
title_fullStr Dynamic pricing with service unbundling
title_full_unstemmed Dynamic pricing with service unbundling
title_sort dynamic pricing with service unbundling
publishDate 2020
url https://hdl.handle.net/10356/142361
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