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

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Quaderni - Working Paper DSE ; No. 1026

Classification and Topics

• Classification: Wirtschaft ; Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection ; Sports; Gambling; Restaurants; Recreation; Tourism

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Savioli, Marco ; Zirulia, Lorenzo
• Event: Veröffentlichung
• (who): Alma Mater Studiorum - Università di Bologna, Dipartimento di Scienze Economiche (DSE)
• (where): Bologna
• (when): 2015

Further information

• DOI: doi:10.6092/unibo/amsacta/4342
• Handle: http://hdl.handle.net/10419/159864
• Last update: 10.03.2025, 11:45 AM CET