Dynamic pricing and service quality decision of products with complimentary service

We consider a monopolist who sells a product bundled with complimentary service. The experience of the customers depends on the associated regular service. Seller incurs a cost providing those services. We find the dynamic optimal pricing and service quality solution for the seller who is subject to a binding lowest service quality threshold. We prescribe three strategies to be used under different service costs: quality guarantee, downgrade and sunset strategy. We show that to creditably guarantee an unaltered service, the seller sets a high initial price to limit the admitted customers. We further find the optimal binding lowest service quality. We show that the seller should commit to not reducing service level when the future service cost is not too high, and should discontinue the service when the cost increases rapidly.