Provision of Optional versus Standard Product Features in Competition

Balachander, Subramanian; Gal‐Or, Esther; Geylani, Tansev; Kim, Alex Jiyoung

doi:10.1509/jm.15.0208

Cited by 7 publications

(5 citation statements)

References 22 publications

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“…However, firm L never offers the add-on in my model, a result in line with Shaked and Sutton (1982). Balachander et al (2017) show that this may not arise if the market is not fully covered.…”

Section: Strategic Commitments and Profitability Of Add-on Policiessupporting

confidence: 71%

“…The model with commitment ability is very similar to the one in Balachander et al (2017), which assumes partial market coverage. Their results are very similar to mine in that both firms have the incentive to be maximally differentiated and that firm H commits to bundling only when the cost is not too large.…”

Section: Strategic Commitments and Profitability Of Add-on Policiesmentioning

confidence: 99%

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Add-on Policies Under Vertical Differentiation: Why Do Luxury Hotels Charge for Internet While Economy Hotels Do Not?

Lin

2017

Marketing Science

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This paper examines firms' product policies when they sell an add-on (e.g., Internet service) in addition to a base product (e.g., hotel rooms) under vertical differentiation (e.g., four-versus three-star hotels). I show that the role of an add-on differs; higher-quality firms prefer to sell it as optional to discriminate consumers, and lower-quality firms trade off discrimination and differentiation, trying to lure consumers from higher-quality rivals with a lower-price add-on. Equilibrium policies of lower-quality firms are more sensitive to the cost-to-value ratio of an add-on. If the ratio is sufficiently small, then they sell it to all consumers, potentially explaining why lower-end hotels are more likely than higher-end ones to offer free Internet service. Contrary to consensus in the literature, optional add-ons can intensify price competition over consumers who trade off a higher-quality base product versus a lower-quality base including an add-on. Hence, higher-quality firms are incentivized to commit to bundling, while lower-quality firms prefer to commit to not selling it. Addons can further reduce lower-quality firms' profits if consumers cannot observe the prices, because holding up consumers ex post encourages them to switch to higher-quality rivals, which then become better off. Therefore, lower-quality firms are incentivized to advertise add-on prices, and higher-quality firms are not. History: Yuxin Chen served as the senior editor and John Zhang served as associate editor for this article.

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Section: Strategic Commitments and Profitability Of Add-on Policiessupporting

confidence: 71%

Section: Strategic Commitments and Profitability Of Add-on Policiesmentioning

confidence: 99%

Add-on Policies Under Vertical Differentiation: Why Do Luxury Hotels Charge for Internet While Economy Hotels Do Not?

Lin

2017

Marketing Science

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“…Third, our paper contributes to the stream of literature on add-on pricing (e.g., Balachander et al 2017, Ellison 2005, Geng and Shulman 2015, Lin 2017, Shulman and Geng 2013). In particular, Ellison (2005) compares a standard competitive pricing game and an unadvertised add-on pricing game to see the differences in competition between firms in a market with heterogeneous consumers and exogenous quality for both the base product and the add-on feature.…”

Section: Related Literaturementioning

confidence: 79%

Effects of On‐Demand Product Adjustments on Firm's Pricing and Product Strategies

Jiang

Shi

Zou

2022

Production and Operations Management

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I n many markets, consumers have time-varying needs for product or service quality. Recent technology advances equip firms with the on-demand product-adjustment capability (OPAC), which allows them to efficiently process customers' requests for short-term (e.g., daily or hourly) changes of service quality to meet their time-varying demands. This paper examines how OPAC affects a firm's optimal pricing and product-line decisions in a market with consumers having timevarying product needs and different average need levels. OPAC gives the firm a new way to price discriminate consumers-having a targeted consumer use a low-end product in her low-need state and upgrade to a high-end product in her high-need state; this contrasts the traditional use of a product line to segment consumers based on their expected valuations, that is, average need levels, whereby each consumer uses only one product and cannot flexibly adjust the product quality over time. We show that OPAC does not always improve the firm's profit: it does so only when consumers' valuations vary significantly over time or when each segment of consumers with different probabilities of having a high valuation is not too small. Moreover, although OPAC enables the firm to provide additional options to serve more consumer segments, it may actually induce the firm to optimally serve fewer consumer segments. One may intuit that OPAC would induce the firm to reduce the low-end product's quality to elicit more upgrades; our analysis shows that, interestingly, OPAC can lead to an increase in quality for both high-end and low-end products.

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“…Two recent contributions which make the choice of offering the add-on endogenous, as we do, are Lin (2017) and Balachander et al (2017). They analyse different variants of a model where offering the add-on does not entail a fixed cost, but baseline products are vertically differentiated.…”

Section: The Economics Of Add-ons: the Theorymentioning

confidence: 99%

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

Savioli

Zirulia

2019

J Econ

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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.

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Provision of Optional versus Standard Product Features in Competition

Cited by 7 publications

References 22 publications

Add-on Policies Under Vertical Differentiation: Why Do Luxury Hotels Charge for Internet While Economy Hotels Do Not?

Add-on Policies Under Vertical Differentiation: Why Do Luxury Hotels Charge for Internet While Economy Hotels Do Not?

Effects of On‐Demand Product Adjustments on Firm's Pricing and Product Strategies

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

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