Optimal pricing problem for a pay-per-use system based on the Internet of Things with intertemporal demand

Kimitoshi Sato, Kenichi Nakashima

Research output: Contribution to journalArticle

Abstract

In recent years, pay-per-use (PPU) services have been introduced that involve metered billing based on data collected from sensor devices. Although such a PPU service provides benefits to customers who are not planning to use the product frequently, the company is exposed to uncertainty regarding the amount of revenue that will be generated. This study examines the conditions under which a PPU service will be effective at increasing a firm's profit in the presence of uncertainty regarding customers' expected and actual usage frequencies. We consider two pricing problems. First, we formulate a single-period model for when the selling price of the product is given and derive an optimal PPU fee to maximize the expected profit. Then, we analytically show that the PPU service has higher profits than the case without the service when the actual usage is higher than the expected usage. Second, we formulate a joint pricing model in which the firm determines jointly the PPU fee and the selling price to maximize the expected profit. Then, we numerically show that the firm benefits from the PPU service when both the customers' valuation and the actual usage are high.

Original languageEnglish
JournalInternational Journal of Production Economics
DOIs
Publication statusAccepted/In press - 2019 Jan 1

Fingerprint

Profitability
Costs
Sales
Planning
Internet of things
Optimal pricing
Sensors
Industry
Profit
Uncertainty

Keywords

  • Internet of things (IoT)
  • Per-use rental
  • Pricing

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

Cite this

Optimal pricing problem for a pay-per-use system based on the Internet of Things with intertemporal demand. / Sato, Kimitoshi; Nakashima, Kenichi.

In: International Journal of Production Economics, 01.01.2019.

Research output: Contribution to journalArticle

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