Behavior-based pricing in service differentiated industries

Abstract

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 subgame 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.