Designing price-service menus in a product-service system

Abstract

We study contract menu design by a vendor leasing production equipment to its clients who serve customers. The equipment can fail which can cause delays to clients' customers. The equipment vendor can offer its clients three types of lease-and-repair contracts: equipment lease with an immediate replacement upon failure, repair with a redundant unit on client premises (parallel layout), and repair without a backup unit on the premises. The vendor does not have full information about each client but knows that clients fall into two types. ‘High’ (vs. ‘Low’) type clients have a higher (vs. lower) willingness to pay but have customers who are more (vs. less) delay-sensitive. Modeling the interaction between the vendor and its clients as a leader-follower game and using queueing theory, we show that a monopolistic vendor can increase its expected profit through second-degree price discrimination by offering a menu of contracts to its clients. We find that when the distribution of customers with low and high willingness to pay is not skewed (one-sided) and either the cost of repair or cost of equipment is low the vendor can increase its profit by inducing price discrimination through offering the menus proposed in the paper.

Keywords:

• Repair
• price-service menus
• mechanism design
• incentive compatibility
• equipment breakdown

Disclosure statement

No potential conflict of interest was reported by the author(s).

Funding

This work was supported by D.J. O'Conor Fellowship [2023].

Notes

1 2017 Q4 Earnings report. Visit news.xerox.com

2 McKinsey (2017). Industrial aftermarket services: Growing the core. Published on: July 2017 McKinsey & Co. https://www.mckinsey.com/industries/advanced-electronics/our-insights/industrial-aftermarket-services-growing-the-core Accessed on: October 27,2018

3 Price Discrimination: Robinson-Patman Violations. (2017, December 15). Retrieved October 10, 2018, from https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/price-discrimination-robinson-patman

Additional information

Notes on contributors

Jagan Jacob

Jagan Jacob is an assistant professor of business analytics in the Williams College of Business at Xavier University, USA. He received a Ph.D. in Business Administration from The University of Rochester. In his research, Dr.Jacob uses mathematical models to solve problems related to revenue management, service operations, and strategic competition between firms. His teaching interests includes operations management, supply chain management, simulation, and optimization.