Year: 2026
Type: article
Abstract: We consider a monopolist who sells a product bundled with complimentary service. The experience of the customers depends on the associated regular service. Seller incurs a cost providing those services. We find the dynamic optimal pricing and service quality solution for the seller who is subject to a binding lowest service quality threshold. We prescribe three strategies to be used under different service costs: quality guarantee, downgrade and sunset strategy. We show that to creditably guarantee an unaltered service, the seller sets a high initial price to limit the admitted customers. We further find the optimal binding lowest service quality. We show that the seller should commit to not reducing service level when the future service cost is not too high, and should discontinue the service when the cost increases rapidly.
Author: Longyuan Du
Institution: University of San Francisco
Language: English
Subfield: Management Information Systems
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,190
Funder: University of San Francisco
OpenAlex ID: W7138365389