Abstract
We investigate customer choice behavior in the presence of main products, ancillary services with options of pay-per-use and subscription, as well as the outside option. The willingness-to-pay for service subscription is obtained in a closed-form expression, which enables us to fully characterize the optimal pricing strategy for main products and ancillary service subscriptions under various scenarios. Analytical results and numerical experiments show that offering service subscriptions may result in “win-win”, “win-win-win”, “win-win-lose”, “lose-lose-win” and other situations for the firm, competitors and customers in various monopolistic and competitive scenarios. The advantages of service subscription remain under heterogeneous scenarios with customers differing on multiple dimensions including demand intensity, uncertainty in the need of ancillary service, utilities of main product and ancillary service.
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