Pricing under quality of service uncertainty: Market segmentation via statistical QoS guarantees

Hemant K. Bhargava and Daewon Sun

European Journal of Operational Research, 2008, vol. 191, issue 3, 1189-1204

Abstract: This article examines how performance-contingent pricing schemes with long-term statistical performance guarantees can be applied to many IT services. We study two forms of performance-contingent pricing, with rebate proportional to failure rate and fixed rebate for below-threshold performance. We show that threshold-performance contingency pricing can increase both profits and fairness (customers who receive higher benefits pay higher effective price) relative to standard pricing. But an even better solution is to offer a menu of performance guarantees: this can increase the firm's profit and segment the market. Only service providers whose performance level is sufficiently better than the industry standard can benefit from this pricing mechanism.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:191:y:2008:i:3:p:1189-1204

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