This article investigates how service-oriented manufacturers, competing with third-party service providers, strategically determine after-sales service quality. It examines whether manufacturers should pursue high-quality or low-quality service positioning under different cost, demand, and warranty conditions. By modeling the interactions between manufacturers and third-party service providers over the product lifecycle, we obtain the optimal service quality strategies that maximize lifecycle profits and provide insights into after-sales service competition.
A two-stage game-theoretic model is developed to capture product and after-sales service decisions between a manufacturer and a third-party service provider. In Stage 1, the manufacturer decides product price and relative service quality (high or low). In Stage 2, both of them simultaneously determine their service prices and quality levels. The model is further extended in two ways. First, it allows generalized service utility, where consumers may still purchase despite nonpositive instant utility. Second, it incorporates warranty coverage. Analytical results and comparative statics identify the equilibrium strategies.
Results reveal that high-quality service strategies generally dominate, as service leadership enhances service differentiation, consumer lock-in and total profitability. However, this advantage becomes conditional under extended models. When service costs are high, consumer sensitivity is low or warranty is long, a low-quality strategy may yield greater profits. Warranty duration exerts dual effects: longer warranties increase consumer utility and product demand but reduce service revenue and raise cost exposure. Profitability therefore depends on the balance between cost efficiency and service-induced demand expansion.
This study extends existing literature by endogenizing relative service quality as a strategic variable, generalizing service utility beyond positive instantaneous values and internalizing warranty duration into the manufacturer's decision framework. It clarifies the conditions under which quality leadership. The article provides theoretical and practical insights for manufacturers transitioning toward service-oriented business models, offering guidance on product pricing, service quality and warranty design to enhance lifecycle profitability.
