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Does add-on presence always lead to lower baseline prices? Theory and evidence

  • Marco Savioli
  • Lorenzo ZiruliaEmail author
Article

Abstract

In many industries, firms give consumers the opportunity to add (at a price) optional goods and services to a baseline product. The aim of our paper is to clarify the effect that offering add-ons has on baseline prices. In order to do that, we develop a theoretical model of add-on pricing in competitive environments with two distinctive features. First, we discuss the choice of offering the add-on, if this entails a fixed cost. Second, we allow firms to have a varying degree of market power over the add-on. In symmetric equilibria, the presence of add-on always reduces baseline prices. In asymmetric equilibria in which only one firm offers the add-on, its presence increases the baseline price if the firm’s market power over the add-on is limited. The latter prediction of the model is confirmed by a hedonic price regression using a dataset of cruises offered worldwide, a situation in which it is possible to control for the level of add-on market power.

Keywords

Add-ons Pricing Cruise industry Hedonic regression 

JEL Classification

D43 L83 

Notes

Acknowledgements

We wish to thank participants of the 2014 “Industrial Organization: Theory, Empirics and Experiment” Conference, University of Salento; the 2014 EARIE Conference, Bocconi University, Milan; the 2015 Forum on Industrial Organization and Marketing—Lupcon Center for Business Research, Lisbon; the 2017 EARIE Conference, Maastricht, for their comments and suggestions. The usual caveat applies.

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Copyright information

© Springer-Verlag GmbH Austria, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of SalentoLecceItaly
  2. 2.RCEAWaterlooCanada
  3. 3.Department of EconomicsUniversity of BolognaBolognaItaly
  4. 4.ICRIOSBocconi UniversityMilanItaly

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