Sales price and service level on a dedicated online service platform: The dynamics under competing reference quality

Abstract

Hardware manufacturers often use mobile apps to provide value-added services for their product users. These platform-based apps can also serve as a sales outlet for the product. Subsequently, manufacturers consider building their own app platforms over relying on third-party platforms. We propose an optimal control model where a manufacturer produces a physical product and sells it through a platform-based app, which subsequently provides services for the product in a finite time horizon. The instantaneous demand is sensitive to the sales price and service level while the stock of registered customers evolves over time. We derive results from two scenarios: Firm-owned platform and third-party platform. Thereafter, the model is extended to consider a competing platform’s service level as a reference quality. The results imply that it would be better for the manufacturer to build its own platform and operate in-house, if it pursues a higher level of service. In contrast, if the manufacturer intends to develop a larger quantity of registered customers, it would be better to use the third-party platform. However, the service level of the latter will gradually decline. To improve the service quality of the third-party platform, the competing platform’s reference quality level plays a significant role. Regardless of whether the initial reference is higher or lower, the third-party platform will increase the service level in the presence of the reference quality.