Add-On Pricing: Theory and Evidence from the Cruise Industry

Quaderni - Working Paper DSE N° 1026

36 Pages Posted: 4 Sep 2015

See all articles by Marco Savioli

Marco Savioli

Department of Economics, University of Bologna; University of Salento - Department of Economics and Mathematics and Statistics; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Lorenzo Zirulia

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM)

Date Written: July 28, 2015

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.

Keywords: Add-on pricing, Cruise industry, Hedonic regression

JEL Classification: D43, L83

Suggested Citation

Savioli, Marco and Savioli, Marco and Zirulia, Lorenzo, Add-On Pricing: Theory and Evidence from the Cruise Industry (July 28, 2015). Quaderni - Working Paper DSE N° 1026, Available at SSRN: https://ssrn.com/abstract=2656041 or http://dx.doi.org/10.2139/ssrn.2656041

Marco Savioli (Contact Author)

Department of Economics, University of Bologna ( email )

Via Angherà 22
RIMINI, RN 47921
Italy

HOME PAGE: http://sites.google.com/site/msavioli/

University of Salento - Department of Economics and Mathematics and Statistics ( email )

Piazza Tancredi, n7
Lecce, 73100
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Lorenzo Zirulia

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

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