On bundling and pricing of the service with the product

Abstract

Integration of service with product is considered as one of the innovative supply chain initiatives of the next decade. In this paper we consider the problem of product-service bundling and pricing. The product and service are two different, but related markets. We consider a complex durable product, which is economically attractive to maintain and service, than to replace. We show that a manufacturing firm that intends to bundle its service with the product, should take into account the other players in the service market as well as the product market. The problem of bundling and pricing are considered for two product market structures: monopoly and duopoly. In the monopoly case, the decision framework is an optimization problem, whereas for the duopoly, the strategic interactions of the two firms are modeled as a two stage non cooperative game. These decision frameworks enable the manufacturing firms to decide upon the product-service bundling and pricing.