How Costs and Heterogeneous Consumer Price Sensitivity Interact with Add-On Pricing

• 成果类型: Article
• 署名作者: Geng, Xianjun; Shulman, Jeffrey D.
• 署名单位: University of Texas System; University of Texas Dallas; University of Washington; University of Washington Seattle
• 刊物名称: PRODUCTION AND OPERATIONS MANAGEMENT
• ISSN/ISSBN: 1059-1478
• DOI: 10.1111/poms.12400
• 发表日期: 2015
• 页码: 1870-1882
• 关键词: OM-economics interface; add-on pricing; competitive price discrimination

摘要

Firms often cite cost savings as a reason why they charge separately for add-ons. Firms also often face situations where consumers' price sensitivity is correlated with their valuation of add-ons. While cost savings may directly translate into profit gains in some scenarios, this study examines the strategic implications of add-on pricing and is the first to suggest that cost savings from add-on pricing may in fact result in profit loss for firms when consumers are heterogeneous in price sensitivity. This is because add-on pricing can trigger a revenue loss that exceeds any cost savings, thus leading to a negative net profit change for competing firms. Even if firms have the capability to pre-commit to not adopting add-on pricing, we show that competing firms can be locked in a prisoner's dilemma where all choose to adopt add-on pricing and lose profits (as compared to none adopting add-on pricing). We further show the possibility that the greater the cost of providing the add-on (and the greater the cost savings generated from add-on pricing), the worse this profit loss gets.