36th Annual Hawaii International Conference on System Sciences, 2003. Proceedings of the (2003)
Big Island, Hawaii
Jan. 6, 2003 to Jan. 9, 2003
Hemant K. Bhargava , Pennsylvania State University
Shankar Sundaresan , Pennsylvania State University
We analyze quality-contingent prices as a mechanism for mitigating the effects of quality uncertainty in e-commerce and IT goods services. A contingency pricing contract specifies a sequence of possible quality levels and corresponding prices. When the public performance probabilities differ from the firm?s private (and true) probabilities, contingency pricing can expand market size and the likelihood of market existence. When the market underestimates the firm?s ability to deliver quality, contingent price contracts are strictly optimal and increase the fraction of buyers. The optimal pricing scheme has a full-price rebate for mis-performance. These results have actionable value in IT-intensive contexts such as electronic retailing, application service providers, telecommunications services, business exchanges, and on-line financial trading services where the information infrastructure allows easy capture, quantification, verifiability and dissemination of quality and performance information.
S. Sundaresan and H. K. Bhargava, "Managing Quality Uncertainty Through Contingency Pricing," 36th Annual Hawaii International Conference on System Sciences, 2003. Proceedings of the(HICSS), Big Island, Hawaii, 2003, pp. 225a.