Pricing of Full‐Service Repair Contracts with Learning, Optimized Maintenance, and Information Asymmetry

Abstract

ABSTRACTThis article considers the optimal pricing of full‐service (FS) repair contracts by taking into account learning and maintenance efficiency effects, competition from service , and asymmetric information. We analyze on‐call service (OS) and FS contracts in a market where customers exhibit heterogeneous risk aversion. While the customers minimize their disutility over the equipment lifetime, the service provider maximizes expected profits arising from the portfolio of OS and FS contracts. We show that the optimal FS price depends inter alia on the customer's prior cost experience and on OS repair and maintenance costs. The optimal FS price is shown to increase as fewer OS customers are lost to competition, whereas improved repair learning enabled by FS reduces the optimal price. A numerical study based on data from a manufacturer of forklifts highlights the importance of learning in maintenance operations, which constitutes the key benefit of FS contracts; 81% of the customers select the FS option and are willing to pay an insurance premium of around 1.5% of total OS cost against volatility of repair costs.