Offering a downgraded service to enhance profit?

Abstract

As market competition is intensified, many firms compete through service. In this paper, we develop a model to examine whether a service supplier should offer a downgraded service as a complement to its high-level service, to compete with a provider of low-level service. We find that only when the service efficiency of the downgraded service is competitively efficient can the service supplier enhance profit by offering the downgraded service. We identify the conditions under which these services can coexist, and when the service supplier should offer the downgraded service. We also show the impact of the downgraded service on pricing decisions, as well as on demands and profits, in such a supply chain. Managerial implications are discussed and numerical examples are included to illustrate the major results in this paper.

Keywords:

• service
• game
• pricing
• competition
• market segmentation
• decision making

Acknowledgements

The authors gratefully acknowledge financial support from the Natural Sciences and Engineering Research Council of Canada and the National Natural Science Foundation of China (Grant No. 71331004 and 71171165).