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

Marco Savioli and Lorenzo Zirulia

Working Paper series from Rimini Centre for Economic Analysis

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 (search for similar items in EconPapers)
JEL-codes: D43 L83 (search for similar items in EconPapers)
Date: 2015-07, Revised 2016-05
New Economics Papers: this item is included in nep-com and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Add-on pricing: theory and evidence from the cruise industry (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:15-26

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