Pricing of Products and Value-Added Services Considering Product Quality and Network Effects

In the operational management of e-commerce platforms, online reviews and user feedback render the issue of anticipated product failure more transparent. The anticipated product failures are often negatively correlated with product quality, while related service guarantees can help customers avoid utility losses caused by such failures. Additionally, the network effect characteristics of products significantly influence customer purchasing behavior and firms’ pricing strategies. This paper employs the multinomial logit (MNL) model to establish an optimization framework for product line and value-added services pricing that accounts for the anticipated failure and associated services. It analyses three scenarios: developing a single product, homogeneous products, and heterogeneous products, deriving optimal price, market share, and maximum profit. Theoretical analysis focuses on how the optimal solutions for single and homogeneous products vary with changes in anticipated failure-induced utility losses, negative network effects, product quality, and service quality. In the numerical experiment, the study explores the effects of variations in utility losses from anticipated failure, network effects, and product and service quality on optimal solutions for heterogeneous products. Finally, the importance of incorporating anticipated failure-induced utility losses into product line and service pricing decisions is emphasized.