Abstract: As servitization becomes a popular strategy, many product-manufacturing firms offer derivative services based on their core products to create more value for consumers and to earn higher profit, i.e. to realize value co-creation. Offering services can be costly, especially when a firm improves service level, while consumers are not likely to pay for the corresponding service costs. As a result, the firm will choose to offer services with low service level and set a high price, which is similar to the so-called "double-marginalization" in supply chain studies. In this paper the existence of double-marginalization when a product-manufacturing firm offers services is verified by building a model which is consist of a decentralized decision-making case and a centralized decision-making case. By comparing equilibrium prices, service levels and profits in the two cases, it is found that in centralized decision-making case the service level and the total profit are higher while the price and the firm's profit are lower. Our finding suggests that consumers and the firm will create more value as a whole in centralized decision-making case while the firm will not choose centralized decision-making mode, i.e. double-marginalization exists when the firm offers services. Then, a revenue sharing contract is used to coordinate profit allocation between consumers and the firm. The conclusions show that the contract can alleviate double marginalization between consumers and the firm. With the contract, the firm will initiatively improve service level and lower price, demand will increase and value co-creation can be realized. At last, numerical experiments are conducted to show how revenue-sharing rate may influence price, demand and profit.

Key words: servitization, service derivative, value co-creation, revenue sharing contract