Two-stage pricing for custom-made products
A commonly observed two-stage pricing strategy for a custom-made product involves a pre-purchase entry fee for a potential consumer and a purchase price if he decides to buy the product. We solve and compare two settings: In the first, the firm does not commit in advance to the second-stage price and in the second, the firm does. We show that without a commitment mechanism, the two price points are strategic complements, in that the higher pre-product fee implies a higher post-product price. With commitment, the two price points are strategic substitutes and the firm can improve profit over the no-commitment case by offering a low purchase price in the second stage and extracting the surplus through an entry fee. When the production cost is low, the commitment solution benefits both the firm and the consumer.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 219 (2012)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/eor|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joseph E. Stiglitz, 1974.
"Incentives and Risk Sharing in Sharecropping,"
Review of Economic Studies,
Oxford University Press, vol. 41(2), pages 219-255.
- Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
- Khouja, Moutaz & Wang, Yulan, 2010. "The impact of digital channel distribution on the experience goods industry," European Journal of Operational Research, Elsevier, vol. 207(1), pages 481-491, November.
- Milgrom, Paul & Roberts, John, 1986.
"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Poulin, Marc & Montreuil, Benoit & Martel, Alain, 2006. "Implications of personalization offers on demand and supply network design: A case from the golf club industry," European Journal of Operational Research, Elsevier, vol. 169(3), pages 996-1009, March.
- Mann, D.P. & Wissink, J.P., 1990. "Money-Back Warranties Vs. Replacement Warranties: A Simple Comparaison," Department of Economics Working Papers 141, Department of Economics, Williams College.
- DeCroix, Gregory A., 1999. "Optimal warranties, reliabilities and prices for durable goods in an oligopoly," European Journal of Operational Research, Elsevier, vol. 112(3), pages 554-569, February.
- Mann, Duncan P & Wissink, Jennifer P, 1990. "Money-Back Warranties vs. Replacement Warranties: A Simple Comparison," American Economic Review, American Economic Association, vol. 80(2), pages 432-436, May.
- Liou, James J.H. & Yen, Leon & Tzeng, Gwo-Hshiung, 2010. "Using decision rules to achieve mass customization of airline services," European Journal of Operational Research, Elsevier, vol. 205(3), pages 680-686, September.
- Alan J. Auerbach & Anthony J. Pellechio, 1978. "The Two-Part Tariff and Voluntary Market Participation," The Quarterly Journal of Economics, Oxford University Press, vol. 92(4), pages 571-587.
- Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
- Julia Liebeskind & Richard P. Rumelt, 1989. "Markets for Experience Goods with Performance Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 601-621, Winter.
- B. P. S. Murthi & Sumit Sarkar, 2003. "The Role of the Management Sciences in Research on Personalization," Management Science, INFORMS, vol. 49(10), pages 1344-1362, October.
- Marín-Solano, Jesús & Navas, Jorge, 2010.
"Consumption and portfolio rules for time-inconsistent investors,"
European Journal of Operational Research,
Elsevier, vol. 201(3), pages 860-872, March.
- Jesus Marin-Solano & Jorge Navas, 2009. "Consumption and Portfolio Rules for Time-Inconsistent Investors," Papers 0901.2484, arXiv.org, revised Mar 2009.
- Holmstrom, Bengt & Milgrom, Paul, 1987.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Econometric Society, vol. 55(2), pages 303-328, March.
- Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
- Christian Terwiesch & Christoph H. Loch, 2004. "Collaborative Prototyping and the Pricing of Custom-Designed Products," Management Science, INFORMS, vol. 50(2), pages 145-158, February.
- Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, December.
- Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
- Bock, Stefan, 2008. "Supporting offshoring and nearshoring decisions for mass customization manufacturing processes," European Journal of Operational Research, Elsevier, vol. 184(2), pages 490-508, January.
- Schlereth, Christian & Stepanchuk, Tanja & Skiera, Bernd, 2010. "Optimization and analysis of the profitability of tariff structures with two-part tariffs," European Journal of Operational Research, Elsevier, vol. 206(3), pages 691-701, November.
- Aigbedo, Henry, 2007. "An assessment of the effect of mass customization on suppliers' inventory levels in a JIT supply chain," European Journal of Operational Research, Elsevier, vol. 181(2), pages 704-715, September.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:219:y:2012:i:2:p:405-414. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.