Consumers' average value for information goods, websites, weather forecasts, music, and news declines with the number consumed. This paper provides simple guidelines to optimal bundling marketing strategies in this case. If consumers' values do not decrease too quickly, we show that bundling is approximately optimal. If consumers' values to subsequent goods decrease quickly, we show by example that one should expect bundling to be suboptimal.bundling, electronic commerce, price discrimination, digital products

With the rise of the Internet economy, an increasing number of firms are offering their core products through online platforms, but retail add‐ons directly to consumers. Meanwhile, many online platforms have also started adopting the agency (model) contract, where the upstream firms decide the retail prices of products while the downstream platforms take a predetermined cut from each sale. This study examines the interaction between an upstream firm's add‐on strategy and a downstream online platform's distribution contract choice. We find that such a firm prefers bundling the add‐on and the core product together under the wholesale contract, but prefers retailing the add‐on separately under the agency contract. Our research thus is the first to suggest that the distribution contract can critically affect a firm's choice between add‐on pricing and bundling. On the platform side, we show that a higher commission rate does not always result in a higher profit for the platform under the agency contract. We further identify two conditions under which the platform prefers the agency contract over the wholesale contract: The commission rate for the platform cannot be too low, and the market potential of the add‐on cannot be too large. For the overall channel, we show that the interaction between add‐on pricing and distribution contracts leads to sub‐optimal channel performance. That said, it is possible for both the firm and the platform to obtain higher profits under the agency contract than under the wholesale contract. Finally, we also demonstrate the robustness of our findings under several alternative model specifications.

We examine operational and incentive issues that conspire to reduce the quality of milk—via deliberate adulteration by milk farmers—acquired by competing collection intermediaries in developing countries. Broadly speaking, three main forces in the milk supply chain lead to the low quality of milk: high testing costs, harmful competition among stations, and free-riding among farmers. The goal of this study is to provide recommendations that address the quality problem with minimal testing. Interestingly, some intuitive interventions—such as providing stations with better infrastructure (e.g., storage and refrigeration facilities) or subsidizing testing costs—could hurt the quality of milk in the presence of competition. To save testing costs we utilize mixed testing, where the milk combined from multiple farmers is tested once. However, mixed testing makes the system vulnerable to free-riding among farmers. We counter free-riding by applying a credible threat of individual testing (although not its actual use in equilibrium). We then propose two interventions to combat the harmful competition among stations. The novelty of our proposals lies in utilizing the force of competition to solve a problem created by competition. The incentives in our proposals provide a new tool for the stations to compete and convert the harmful effect of competition (quality reduction) into a beneficial one (quality improvement), resulting in a socially desirable equilibrium outcome: all the farmers provide high-quality milk and each competing station conducts only one mixed test and no further testing. This paper was accepted by Serguei Netessine, operations management.

This paper examines a market where the provision of information service is costly, but information service has the characteristics of a public good. Consumers, on the other hand, can use the information service to make an informed purchase decision and derive higher utility from consuming their ideal product. However, after receiving the information service from an information service provider, consumers can easily free ride by purchasing at low-price sellers who do not provide any information service. The paper examines the competition where sellers compete by providing information service for horizontally differentiated products and where technology reduces consumers' search cost. It is found that in this market a seller needs to establish itself as an information service provider in order to make positive profits, even when there is free riding. A seller, however, cannot make positive profits by free riding all the time. Also, with an increase in competition in the information service market, sellers have reduced incentives to provide information service. It is also found that in this market a decrease in search cost may increase or decrease social welfare.free riding, search cost, electronic markets, electronic commerce

T his paper uses an analytical model to examine the consequences of add-on pricing when firms are both horizontally and vertically differentiated and there is a segment of boundedly rational consumers who are unaware of the add-on fees at the time of initial purchase. We find that consumers who know the add-on fees can be penalized-and increasingly so-by the existence of boundedly rational consumers. Our consideration of quality asymmetries on base goods and add-ons, plus the inclusion of boundedly rational consumers, leads to several novel findings regarding firm profits. When quality asymmetry is on base goods only and with boundedly rational consumers, add-on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm (i.e., a lose-win result), compared to when add-on pricing is prohibited or infeasible. When quality asymmetries exist on both base goods and add-ons and without boundedly rational consumers, the opposite win-lose result prevails. When quality asymmetries exist on both base goods and add-ons and with boundedly rational consumers, the result can be win-win, win-lose, or lose-win, depending on the magnitude of quality differentiation on add-ons.

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A consumer contest is a sales promotion technique that requires participants to apply certain skills as they compete for prizes or awards. This article is the first to employ a game-theoretical approach to investigate consumer contest design issues, including prize structure, segmentation, and handicapping. First, the authors find that both skill distribution and the number of contestants play an important role in determining the optimal prize structure in consumer contests. Specifically, if the skill distribution has the increasing hazard-rate property, it is optimal for a marketer to use a winner-take-all design. In large contests, for the winner-take-all approach to be optimal, it suffices to have the increasing hazard-rate property only at the high end of the skill distribution. Second, increasing contest size is beneficial to the marketer. Third, a less dispersive skill distribution leads to higher consumption by consumers at all skill levels and thus is beneficial to the marketer. The marketer may achieve less dispersive skill distributions by (1) segmenting or screening contestants according to their skill levels and (2) adopting a performance evaluation scheme that handicaps high-skilled contestants.

F irms often cite cost savings as a reason why they charge separately for add-ons. Firms also often face situations where consumers' price sensitivity is correlated with their valuation of add-ons. While cost savings may directly translate into profit gains in some scenarios, this study examines the strategic implications of add-on pricing and is the first to suggest that cost savings from add-on pricing may in fact result in profit loss for firms when consumers are heterogeneous in price sensitivity. This is because add-on pricing can trigger a revenue loss that exceeds any cost savings, thus leading to a negative net profit change for competing firms. Even if firms have the capability to pre-commit to not adopting add-on pricing, we show that competing firms can be locked in a prisoner's dilemma where all choose to adopt add-on pricing and lose profits (as compared to none adopting add-on pricing). We further show the possibility that the greater the cost of providing the add-on (and the greater the cost savings generated from add-on pricing), the worse this profit loss gets.