Missed Sales and the Pricing of Ancillary Goods

Renato Gomes and Jean Tirole

No 12832, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Firms often sell a basic good as well as ancillary ones. Hold-up concerns have led to ancillary good regulations such as transparency and price caps. The hold-up narrative, however, runs counter to evidence in many retail settings where ancillary good prices are set below cost (e.g. free shipping, or limited card surcharging in countries where the “no-surcharge rule†was lifted). We argue that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good’s cost so as not to miss sales on the basic good. A supplier with market power on the ancillary good market then takes advantage of cost absorption and jacks up its wholesale price. Hold-ups occur only when consumers are initially uninformed or naïve about the drip price and shopping costs are high. The price of the basic good then acts as a signal of the drip price, since a high markup on the basic good makes the firm more wary of missed sales. Regardless of whether consumers are informed, uninformed-but-rational, or naïve, mandating price transparency and banning loss-making on the ancillary good leads to (i) an efficient consumption of the ancillary good, and (ii) a reduction of its wholesale price, generating strict welfare gains.

Keywords: Add-ons; Drip pricing; Missed sales; Give-aways; Hold-ups (search for similar items in EconPapers)
JEL-codes: D83 L10 L41 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-com, nep-mkt and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: Missed Sales and the Pricing of Ancillary Goods* (2018)
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