Strategic Investment Timing and Consumer Savviness for Add-On Services

Kohei Daido () and Keizo Mizuno ()
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Kohei Daido: Kwansei Gakuin University
Keizo Mizuno: Kwansei Gakuin University

No 298, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: We examine duopolistic competition within a real options framework, where two firms provide horizontally differentiated core goods along with vertically differentiated add-on services. Focusing on consumer savviness regarding the quality of add-on services, we analyze its impact on prices, investment timing, and social welfare. Our analysis yields three main findings. First, the price of a core good with high-quality add-on services is lower (resp. higher) than that of a core good with low-quality add-on services when the proportion of non-savvy consumers in the population is high (resp. low). Second, both firms are incentivized to invest preemptively when the proportion of non-savvy consumers is high or the quality difference in add-on services is small; however, when the proportion of non-savvy consumers is low or the quality gap is significant, only the firm offering high-quality add-on services retains this incentive. Third, as the proportion of non-savvy consumers decreases, the flow of social surplus increases; nonetheless, the overall expected social welfare may decline due to a delay in the follower's investment and a prolonged monopoly duration. This suggests a need for a policy mix that combines consumer protection with the encouragement of market entry.

Keywords: add-on service; consumer savviness; real options; investment timing; delay. (search for similar items in EconPapers)
JEL-codes: D90 L22 L24 M21 O31 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2025-09
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
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