Pricing bundles of products and services in the high-tech industry

Abstract

The High-Tech industry faces tremendous complexity in product design because of the large number of different products that can be offered and the mix of products and services that exists. Information Technology (IT) products and services available in the market are increasing exponentially. Bundling appears in this industry as a natural mechanism to reduce complexity for sellers and buyers and to reduce variability on the customer's valuation of individual products. The first chapter of this dissertation discusses these issues. Chapter Two addresses the real-world problem of pricing bundles of IT services and products contracts when there is a high setup cost. Customers pay a fixed monthly fee. The company finances the hardware (HW) and software (SW) while the services and support are paid in a monthly basis out of the fee. The solution approach computes the monthly fee to be charged for every offered bundle, taking into account that customers may defect before the end of the contract. The dynamics of the system account for defection of current customers and arrival of new ones, at each period. Optimal pricing policies and equilibrium points of the system are characterized. Chapter Three addresses the determination of the optimal bundle's composition and price while maximizing total expected profits. The setting is a high-tech company in a highly competitive environment that must build a bundle and put it out in the market. Bundles are built from a set of components that meet technical constraints. The customers' choice among competitors' bundles (not under the company's control) and the company's bundle (under its control) is modeled in a random utility framework. A nonlinear mixed integer programming formulation of the company's decision problem is presented and solved.

(cont.) Chapter Four analyzes telecommunications networks for broadband services. The network consists of several regions whose connecting links have a given bandwidth capacity at each point in time. Bandwidth is an intangible perishable commodity that has to be sold in advance. The network owner faces the problem of selling the available bandwidth capacity of the delivery period from the present to the last selling period. In the analysis, the network owner faces an external demand for each market or product (capacity between two cities) that can be fulfilled by assigning capacity of the corresponding arc (direct link) or by assigning capacity of an alternative path (indirect link), incurring a higher cost. Customers do not distinguish between routings as long as the requested connection between the pair of cities fulfills the specified Quality of Service. The goal is to maximize the network owner's revenues while deciding on each period whether or not to bundle links.