Contingency Pricing for Information Goods and Services Under Industrywide Performance Standard.

Author List: Bhargava, Hemant K.; SUNDARESAN, SHANKAR;
Journal of Management Information Systems, 2003, Volume 20, Issue 2, Page 113-136.
This paper demonstrates that quality-contingent pricing is a useful mechanism for mitigating the negative effects of quality uncertainty in e-commerce and information technology services. Under contingency pricing of an information good or service, the firm preannounces a rebate for poor performance. Consumers determine performance probabilities using publicly available historical performance data, and the firm may have additional private information with respect to its future probability distribution. Examining the monopoly case, we explicate the critical role of private information and differences in belief between the firm and market in the choice of pricing scheme. Contingent pricing is useful when the market underestimates the firm's performance; then it is optimal for the firm to offer a full-price rebate for misperformance, with a correspondingly higher price for meeting the performance standard. We study the competitive value of contingency pricing in a duopoly setting where the firms differ in their probabilities of meeting the performance standard, but are identical in other respects. Contingency pricing is a dominant strategy for a firm when the market underestimates the firm's performance. Whereas both firms would earn equal profits if they were constrained to standard pricing, the superior firm earns greater profits under contingency pricing by setting lower expected prices. We show that contingency pricing is efficient as well, and consumer surplus increases because more consumers buy from the superior firm.
Keywords: contingency pricing; Information Goods; Information Technology Outsourcing; Money-back guarantees; pricing of IT services; Quality Uncertainty
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List of Topics

#5 0.194 consumer consumers model optimal welfare price market pricing equilibrium surplus different higher results strategy quality cost lower competition firm paper
#114 0.181 performance firm measures metrics value relationship firms results objective relationships firm's organizational traffic measure market study improve accounting measuring aggregate
#195 0.177 pricing services levels level on-demand different demand capacity discrimination mechanism schemes conditions traffic paper resource expected based constraints solution latency
#62 0.097 price buyers sellers pricing market prices seller offer goods profits buyer two-sided preferences purchase intermediary traditional marketplace decisions intermediaries selling
#225 0.088 information environment provide analysis paper overall better relationships outcomes increasingly useful valuable available increasing greater regarding levels decisions viewed relative
#165 0.078 uncertainty contingency integration environmental theory data fit key using model flexibility perspective environment perspectives high conditions processing examine issue uncertain
#226 0.059 models linear heterogeneity path nonlinear forecasting unobserved alternative modeling methods different dependence paths efficient distribution probabilities demonstrate observed heterogeneous probability
#211 0.051 service services delivery quality providers technology information customer business provider asp e-service role variability science propose logic companies especially customers