The pricing of product and value-added service under information asymmetry: a product life cycle perspective

Abstract

Facing fierce competition in the global manufacturing industry, manufacturers have begun developing value-added services to increase their competitiveness. One type of sales strategy that has become prevalent is for companies to offer consumers, a relatively low price for value-added services when consumers buy the services simultaneously with the product and a relatively high price for the same value-added services in the future. Considering the degree of information asymmetry about service quality and the changes of it in a product life cycle, this paper examines the pricing of product and value-added service. Four types of pricing strategies are proposed that depend on the time that consumers choose to buy the value-added service. In addition, the results of our study show that a manufacturer choosing a pricing strategy should consider the degree of information asymmetry and consumers’ initial expectations regarding the value-added service quality. When consumers’ initial expectations regarding the value-added service quality are high, the manufacturer should choose one of the four pricing strategies that encourage consumers to buy the service simultaneously with the product. When consumers’ initial expectations regarding the value-added service quality are low, the optimal strategy for the manufacturer depends on the difference in the degree of information asymmetry.