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

Author

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  • Marco Savioli

    () (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy)

  • Lorenzo Zirulia

    () (Department of Economics, University of Bologna, Italy; CRIOS, Bocconi University, Italy; The Rimini Centre for Economic Analysis, Italy)

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.

Suggested Citation

  • Marco Savioli & Lorenzo Zirulia, 2015. "Add-On Pricing: Theory and Evidence From the Cruise Industry," Working Paper series 15-26, Rimini Centre for Economic Analysis, revised May 2016.
  • Handle: RePEc:rim:rimwps:15-26
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    References listed on IDEAS

    as
    1. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 585-637.
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    Cited by:

    1. Vincenza Odorici & Manuela Presutti & Marco Savioli, 2016. "Strategic orientation of hotels: evidence from a contingent approach," Working Paper series 16-06, Rimini Centre for Economic Analysis, revised May 2016.

    More about this item

    Keywords

    Add-on pricing; Cruise industry; Hedonic regression;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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