October  2020, 7(4): 351-364. doi: 10.3934/jdg.2020027

Behavior-based pricing in service differentiated industries

School of Economics and Management, Nanjing University of Science and Technology, Nanjing, 210094, China

* Corresponding author: Hua-Ming Song

Received  June 2020 Revised  June 2020 Published  October 2020 Early access  August 2020

Fund Project: This paper is supported by NSFC grant 71172105 and 71571102

Firms often upgrade service level to enhance their profitability, which leads to competing firms at service disadvantages using behavior-based pricing (BBP) strategy to fight back. The interaction between service differentiation and BBP affects the profits of both competitors. In order to explore the impact of BBP on the competition of firms with service differentiation, we use game theory method to construct a two-period dynamic pricing model. We explore the optimal BBP strategy by comparing and analyzing firms sub-game equilibrium profits. The main conclusions are as follows: (ⅰ) the degree of service differentiation and the relative service cost interact to influence firms optimal pricing strategy. Specifically, when the degree of service differentiation is low (high) and the relative service cost is small (large), both firms do not adopt (adopt) BBP. When the degree of service differentiation is low (high) but the relative service cost is large (small), competing firms have mixed strategic Nash equilibrium, and both firms have a certain probability to adopt BBP. (ⅱ) BBP can help low-service firms to make up for the profits loss caused by the service disadvantage under certain conditions. However, it can lead to fierce price competition, which will damage the profits of both.

Citation: Dong-Sheng Ma, Hua-Ming Song. Behavior-based pricing in service differentiated industries. Journal of Dynamics and Games, 2020, 7 (4) : 351-364. doi: 10.3934/jdg.2020027
References:
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A. DumrongsiriM. FanA. Jain and K. Moinzadeh, A supply chain model with direct and retail channels, Eur. J. Oper. Res., 187 (2008), 691-718.  doi: 10.1016/j.ejor.2006.05.044.

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C. FanY. Liu and and X. Chen, Pricing and service cooperation in BOPS implementation: Considering channel competition and consumer behavior, J. Syst. Eng., 147 (2018), 101-111. 

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Y. Jeong and M. Maruyama, Positioning and pricing strategies in a market with switching costs and staying costs, Inform. Econom. Policy, 44 (2018), 47-57.  doi: 10.1016/j.infoecopol.2018.03.001.

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B. Jing, Customer recognition in experience vs. inspection good markets, Manag. Sci., 62 (2016), 216-224.  doi: 10.1287/mnsc.2014.2114.

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B. Jing, Behavior-based pricing, production efficiency, and quality differentiation, Manag. Sci., 147 (2017), 2365-2376.  doi: 10.1287/mnsc.2016.2463.

[9]

H. Kurata and S. H. Nam, After-sales service competition in a supply chain: Does uncertainty affect the conflict between profit maximization and customer satisfaction?, Internat. J. Prod. Econom., 144 (2013), 268-280.  doi: 10.1016/j.ijpe.2013.02.014.

[10]

K. J. Li, Behavior-based pricing in marketing channels, Marketing Sci., 37 (2018), 310-326. 

[11]

W. Li and J. Chen, Pricing and service competition in a brand-differentiated supply chain, Internat. J. Prod. Econom., 202 (2018), 97-108. 

[12]

K. J. Li and S. Jain, Behavior-based pricing: An analysis of the impact of peer-induced fairness, Manag. Sci., 62 (2016), 2705-2721.  doi: 10.1287/mnsc.2015.2265.

[13]

K. LiuY. Lan and W. Li, Behavior-based pricing between organic and general food enterprises, British Food J., 122 (2019), 107-121.  doi: 10.1108/BFJ-08-2018-0500.

[14]

X. QinQ. SuS. H. HuangU. J. Wiersma and M. Liu, Service quality coordination contracts for online shopping service supply chain with competing service providers: Integrating fairness and individual rationality, Oper. Res., 19 (2017), 269-296.  doi: 10.1007/s12351-016-0288-z.

[15]

Q. Shen and J. M. Villas-Boas, Behavior-based advertising, Manag. Sci., 64 (2018), 2047-2064.  doi: 10.1287/mnsc.2016.2719.

[16]

C. R. Taylor, Supplier surfing: Competition and consumer behavior in subscription markets, RAND J. Econom., 34 (2003), 223-246. 

[17]

L. Tian and Y. Xu, Dynamic channel selection and pricing based on customer behavior, J. Manag. Sci. China, 18 (2015), 39–51, 94.

[18]

J. M. Villas-Boas, Price cycles in markets with customer recognition, RAND J. Econom., 35 (2004), 486-501.  doi: 10.2307/1593704.

[19]

L. WangH. Song and Y. Wang, Pricing and service decisions of complementary products in a dual-channel supply chain, Comput. Indust. Eng., 144 (2017), 223-233.  doi: 10.3934/jimo.2018046.

[20]

C. H. Wu, Price and service competition between new and remanufactured products in a two-echelon supply chain, Internat. J. Prod. Econom., 140 (2012), 496-507.  doi: 10.1016/j.ijpe.2012.06.034.

[21]

J. XieW. ZhangY. XiaJ. Yin and G. Yang, The revenue and cost sharing contract of pricing and servicing policies in a dual-channel closed-loop supply chain, J. Cleaner Prod., 191 (2018), 361-383.  doi: 10.1051/ro/2019024.

[22]

F. ZhangY. Zhang and X. Xu, Retailer's return policy based on strategic consumer behavior, J. Manag. Sci. China, 11 (2017), 105-118. 

show all references

References:
[1]

C. ChoeS. King and N. Matsushima, Pricing with cookies: Behavior-based price discrimination and spatial competition, Manag. Sci., 64 (2018), 5669-5687.  doi: 10.1287/mnsc.2017.2873.

[2]

A. DumrongsiriM. FanA. Jain and K. Moinzadeh, A supply chain model with direct and retail channels, Eur. J. Oper. Res., 187 (2008), 691-718.  doi: 10.1016/j.ejor.2006.05.044.

[3]

C. FanY. Liu and and X. Chen, Pricing and service cooperation in BOPS implementation: Considering channel competition and consumer behavior, J. Syst. Eng., 147 (2018), 101-111. 

[4]

L. Flees and T. Senturia, Its the after-sales service, stupid, Business Week Online, 2008.

[5]

D. Fudenberg and J. Tirole, Customer Poaching and Brand Switching, Rand J. Econom., 31 (2000), 634-657.  doi: 10.2307/2696352.

[6]

Y. Jeong and M. Maruyama, Positioning and pricing strategies in a market with switching costs and staying costs, Inform. Econom. Policy, 44 (2018), 47-57.  doi: 10.1016/j.infoecopol.2018.03.001.

[7]

B. Jing, Customer recognition in experience vs. inspection good markets, Manag. Sci., 62 (2016), 216-224.  doi: 10.1287/mnsc.2014.2114.

[8]

B. Jing, Behavior-based pricing, production efficiency, and quality differentiation, Manag. Sci., 147 (2017), 2365-2376.  doi: 10.1287/mnsc.2016.2463.

[9]

H. Kurata and S. H. Nam, After-sales service competition in a supply chain: Does uncertainty affect the conflict between profit maximization and customer satisfaction?, Internat. J. Prod. Econom., 144 (2013), 268-280.  doi: 10.1016/j.ijpe.2013.02.014.

[10]

K. J. Li, Behavior-based pricing in marketing channels, Marketing Sci., 37 (2018), 310-326. 

[11]

W. Li and J. Chen, Pricing and service competition in a brand-differentiated supply chain, Internat. J. Prod. Econom., 202 (2018), 97-108. 

[12]

K. J. Li and S. Jain, Behavior-based pricing: An analysis of the impact of peer-induced fairness, Manag. Sci., 62 (2016), 2705-2721.  doi: 10.1287/mnsc.2015.2265.

[13]

K. LiuY. Lan and W. Li, Behavior-based pricing between organic and general food enterprises, British Food J., 122 (2019), 107-121.  doi: 10.1108/BFJ-08-2018-0500.

[14]

X. QinQ. SuS. H. HuangU. J. Wiersma and M. Liu, Service quality coordination contracts for online shopping service supply chain with competing service providers: Integrating fairness and individual rationality, Oper. Res., 19 (2017), 269-296.  doi: 10.1007/s12351-016-0288-z.

[15]

Q. Shen and J. M. Villas-Boas, Behavior-based advertising, Manag. Sci., 64 (2018), 2047-2064.  doi: 10.1287/mnsc.2016.2719.

[16]

C. R. Taylor, Supplier surfing: Competition and consumer behavior in subscription markets, RAND J. Econom., 34 (2003), 223-246. 

[17]

L. Tian and Y. Xu, Dynamic channel selection and pricing based on customer behavior, J. Manag. Sci. China, 18 (2015), 39–51, 94.

[18]

J. M. Villas-Boas, Price cycles in markets with customer recognition, RAND J. Econom., 35 (2004), 486-501.  doi: 10.2307/1593704.

[19]

L. WangH. Song and Y. Wang, Pricing and service decisions of complementary products in a dual-channel supply chain, Comput. Indust. Eng., 144 (2017), 223-233.  doi: 10.3934/jimo.2018046.

[20]

C. H. Wu, Price and service competition between new and remanufactured products in a two-echelon supply chain, Internat. J. Prod. Econom., 140 (2012), 496-507.  doi: 10.1016/j.ijpe.2012.06.034.

[21]

J. XieW. ZhangY. XiaJ. Yin and G. Yang, The revenue and cost sharing contract of pricing and servicing policies in a dual-channel closed-loop supply chain, J. Cleaner Prod., 191 (2018), 361-383.  doi: 10.1051/ro/2019024.

[22]

F. ZhangY. Zhang and X. Xu, Retailer's return policy based on strategic consumer behavior, J. Manag. Sci. China, 11 (2017), 105-118. 

Figure 1.  Products market share segmentation
Figure 2.  Firms optimal pricing strategy with service differentiation
Figure 3.  Impact of BBP on firms' profits with service differentiation
Table 1.  Revenue matrix for firms with service differentiation
Table 2.  Revenue matrix for firms without service differentiation
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