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Abstract
In this talk we study a monopolistic firm that offers reusable products, or a service, to price and quality-of-service sensitive customers - a rental firm can be thought of as the canonical example. Customers' perception of quality is determined by their likelihood of obtaining the product or service immediately upon request. We study the alternatives of offering either a subscription option or a pay-per-use option from a profit-maximizing perspective. In order to do this we propose a Markovian model of how subscribers generate requests and use a standard Poisson model for the pay-per-use option. In a large market setting, under the assumption of exponential demand, we show that using the subscription option is more profitable for the firm. Further, via a numerical study, we show that this assumption is not essential for the result to hold. However, we show that it is not necessarily true that the subscription option dominates the pay-per-use option on quality-of-service. The firm is able to manage the trade-off between price and quality-of-service better in the subscription option. Moreover, we show that the social welfare and the consumer surplus can also be higher in the subscription option, indicating that both the firm and the consumers can benefit from the subscription option.
