Academic journal article Journal of Business Strategies

Service Provision and Product Differentiation: A Comment to "A Note on the Strategic Use of Service"

Academic journal article Journal of Business Strategies

Service Provision and Product Differentiation: A Comment to "A Note on the Strategic Use of Service"

Article excerpt

Abstract

Hegji and Moore (2005, p. 140) state, "The bottom line for managers is that although the provision of service may at times seem attractive, in that increased services allow for higher prices, price competition should be considered the preferred long-run strategy." Contrary to their result we find that service provision is profitable in the long run and can be associated with lower prices. Additionally, we discuss the value of product differentiation. Our paper builds on their results in three ways: providing an additional setting of homogeneous goods duopoly, providing the profits under the three scenarios (Hegji and Moore's monopoly and differentiated price duopoly, and our homogeneous goods duopoly) with and without service provision, and a discussion of the managerial implications in terms of both service provision and product differentiation.

Introduction

Hegji and Moore (2005) present a model of service provision under two settings: a monopoly and a differentiated price duopoly. Their results indicate that prices are greater in the case of the duopoly, which is unexpected as monopoly pricing is typically greater than that of other market structures. They then discuss the implications of the model in terms of consumer surplus rather than profitability.

We build on their results in three ways: we provide an additional setting of homogeneous goods duopoly, we provide the profits under the three scenarios (Hegji and Moore's monopoly and differentiated price duopoly, and our homogeneous goods duopoly) with and without service provision, and we discuss the managerial implications in terms of both service provision and product differentiation. Contrary to Hegji and Moore's conclusion that "... the provision of service may at times seem attractive, in that increased services allow for higher prices, price competition should be considered the preferred long-run strategy," we find that service provision is profitable in the long run and discuss the value of product differentiation.

Additionally, our results reveal necessary restrictions on the differentiated price duopoly model presented by Hegji and Moore. These findings provide insight as to whether product differentiation is worthwhile.

Much of the remainder of the paper is of a technical, or mathematical, nature. We would like to briefly mention some of the managerial implications at this point for those readers who are not interested in the technical details. Contrary to the findings of Hegji and Moore, our results indicate that managers should consider product differentiation as a means for increasing profitability if they are competing in markets where the product has accompanying service provision that is of value to consumers. However, if product differentiation is not possible, then managers should determine if demand for their product is affected by the level of service associated with the product being sold. Our results indicate that if demand is indeed affected by the level of service, then service provision can lead to greater profitability with lower prices for non-differentiated goods. This result provides a counterpoint to Hegji and Moore's claim that increased services results in higher prices. According to the framework used in this paper, and those of Hegji and Moore (2005) and Pepall, Richards, and Norman (2002), the increased profitability occurs as increasing service leads to increases in consumer willingness to pay. This increase can induce a consumer who was not previously buying the product, but seriously considering purchasing, to now buy the product; this potential buyer is known in the economics literature as a marginal consumer. As the number of marginal consumers increases, there is generally a greater return to service provision.

The remainder of the paper is organized as follows. Section II presents the results ofduopolists providing services in a strategic setting involving homogeneous, i. …

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