Add-on Pricing by Asymmetric Firms

Shulman, Jeffrey D.; Geng, Xianjun

doi:10.1287/mnsc.1120.1603

Cited by 93 publications

(44 citation statements)

References 50 publications

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“…, Raghunathan ). Further, Shulman and Geng () studied the add‐on pricing strategies of two vertical differentiated firms. More closely aligned with our research, several researchers have studied the software free trial issue (Cheng and Liu , Cheng and Tang , Cheng et al.…”

Section: Literature Reviewmentioning

confidence: 99%

Optimal Pricing Model of Digital Music: Subscription, Ownership or Mixed?

Li¹,

Luo

Qiu

et al. 2020

Production and Operations Management

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Traditionally, consumers purchase physical music (often in the form of CDs or cassettes) from local retailers. With the development of Internet technology, the market share of digital music has grown rapidly in recent years. Unlike physical music, digital music is provided by several emerging digital music providers through the Internet to consumers. Pricing models of digital music are also drastically different from those of physical music. In this study, we identify three common schemes for selling digital music: ownership, subscription and mixed pricing models. Under the ownership model, consumers purchase and download their preferred songs and enjoy music using their local devices. Under the subscription model, music is provided through an online streaming service. The mixed pricing model is a combination of the previous two. Our paper explores and compares the three pricing models. Through a stylized model, we find that several factors, including the advertisement revenue rate and consumers’ reservation value for the music service, have crucial effects on the comparison of the three pricing models.

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Section: Literature Reviewmentioning

confidence: 99%

Optimal Pricing Model of Digital Music: Subscription, Ownership or Mixed?

Li¹,

Luo

Qiu

et al. 2020

Production and Operations Management

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“…Compared with the unregulated outcome, both profits and social welfare would increase if firms could commit to producing higher-quality products. Shulman and Geng [18] use 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 BR consumers. When quality asymmetry is on base goods only and with BR consumers, add-on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm compared with when add-on pricing is prohibited or infeasible.…”

Section: Related Literaturesmentioning

confidence: 99%

“…Consumers differ in the information about the certification systems. Similar to Shulman and Geng [18], we state that a proportion θ ∈ (0, 1] of consumers (i.e., BR consumers) presents a lack of awareness of certification logos on packages and cannot detect the mislabeling problems. Therefore, they believe that the certified (uncertified) products are of high (low) quality.…”

Section: The Modelmentioning

confidence: 99%

Voluntary Certification of Agricultural Products in Competitive Markets: The Consideration of Boundedly Rational Consumers

Zhang

2016

Sustainability

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Market competition creates strategic incentives for firms to communicate private information about their own product quality through certification. Although voluntary certification has recently gained importance in the agricultural industry, information asymmetry is not always completely addressed. This study analyzes how the relative proportion of boundedly rational consumers in the market influences the effectiveness of voluntary certification mechanisms by using a duopoly game model of high-and low-quality firms. The presented results show that a change in the proportion of boundedly rational consumers leads to different certification behaviors and a different market equilibrium. We also find that the existence of boundedly rational consumers is an important factor in the failure of voluntary certification. Indeed, when the relative proportion of such consumers is very high, voluntary certification is ineffective at improving market efficiency.

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“…Our work bears similarity to Shulman and Geng () who also examine the profitability of add‐on pricing. Though both models examine add‐on pricing decisions by horizontally differentiated firms, there are notable differences in the model that lead to substantively different results.…”

Section: Summary and Managerial Implicationsmentioning

confidence: 99%

How Costs and Heterogeneous Consumer Price Sensitivity Interact with Add‐On Pricing

Geng

Shulman

2015

Production and Operations Management

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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.

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Add-on Pricing by Asymmetric Firms

Cited by 93 publications

References 50 publications

Optimal Pricing Model of Digital Music: Subscription, Ownership or Mixed?

Optimal Pricing Model of Digital Music: Subscription, Ownership or Mixed?

Voluntary Certification of Agricultural Products in Competitive Markets: The Consideration of Boundedly Rational Consumers

How Costs and Heterogeneous Consumer Price Sensitivity Interact with Add‐On Pricing

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