Pricing strategies for a bundled channel with services network effects

This paper examines the impact of channel contracts on pricing strategies and profitability with considering service network effects. Specifically, we model a bundled distribution channel that consists of a product manufacturer and a service operator under two popular channel contracts (the wholesale contract and the agency contract). The optimal pricing policies for the product manufacturer and service operator are derived under both contracts. We compare channel performance under two channel contacts, and we find that the marginal costs of manufacturer play a critical role. When the marginal manufacturing cost is relatively small, the agency bundled channel outperforms the wholesale bundled channel; when the marginal manufacturing cost is sufficiently large, the wholesale bundled channel is better. We further identify two conditions under which the agency contract is preferred over the wholesale contract. For service network externality, we show that it has a remarkable effect on pricing scheme, market demand and total channel performance. Our research thus is the first to investigate the influence of distribution contracts and service network externality on the bundled channel dynamics.