Add-on pricing: theory and evidence from the cruise industry

Savioli, Marco ; Zirulia, Lorenzo (2015) Add-on pricing: theory and evidence from the cruise industry. Bologna: Dipartimento di Scienze economiche DSE, p. 36. DOI 10.6092/unibo/amsacta/4342. In: Quaderni - Working Paper DSE (1026). ISSN 2282-6483.
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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 provide a theoretical model of add-on pricing in competitive environments with two new distinctive features. First, we discuss the choice of offering the add-on, assuming that this entails a fixed cost. Second, we allow firms to have a varying degree of market power over the add-on, associated with the ability to capture the value that consumers obtain from such an additional good/service. Our model shows that the conventional wisdom, according to which offering the add-on should unambiguously lower the price of the baseline product, is not always supported. In asymmetric equilibria, in which only one firm offers the add-on, baseline prices are higher if the firm’s market power over the add-on is limited. The predictions of the model are confirmed by a hedonic price model on a dataset of cruises offered worldwide.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Savioli, Marco
Zirulia, Lorenzo
Keywords
Add-on pricing, Cruise industry, Hedonic regression
Subjects
ISSN
2282-6483
DOI
Deposit date
04 Sep 2015 10:15
Last modified
23 Oct 2015 09:09
URI

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