A Model of Add-on Pricing

Topics:
Competitive Pricing,
Pricing Strategy
Tags:
Marketing,
Marketing Research,
Massachusetts Institute Of Technology,
Model,
Pricing,
Pricing Strategy
Source:
Massachusetts Institute of Technology

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Overview: This paper develops a model of competitive price discrimination with horizontal and vertical differentiation. The main application is to add-on pricing - advertising low prices for one good in hopes of selling additional products at high prices. Price discrimination is self-reinforcing: the model sometimes has both equilibria in which all firms practice price discrimination and equilibria in which none do. The paper focuses on the Chicago-school argument that profits earned on add-ons will be competed away via lower prices for advertised goods. The most important observation is that the adoption of add-on pricing practices can create an adverse selection problem that makes price-cutting unappealing, thereby raising equilibrium profits.

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Format: PDF | Size: 291KB | Date: Jun 2004 | Pages: 46

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