A Model of Add-On Pricing

By Glenn Ellison. 2004

479 citations recorded by the source corpus.

This paper examines a competitive model of add-on pricing, the practice of advertising low prices for one good in hopes of selling additional products (or a higher quality product) to consumers at a high price at the point of sale. The main conclusion is that add-on pricing softens price competition between firms and results in higher equilibrium profits.

Subfields: Economics and Econometrics, Marketing, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/7dfe381d71733d961d6c7ba87dbae43b2181a137

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Citations in the corpus

Fettered Consumers and Sophisticated Firms: Evidence from Mexico's Privatized Social Security Market (2012, background): “Sophisticated firms in our context optimized against behavioral biases rather than competing to undo them (Ellison 2005; Gabaix and Laibson 2006; Ellison and Ellison 2009; Hastings, Hortaçsu and Syverson 2012).”
FINANCIAL LITERACY, FINANCIAL EDUCATION AND ECONOMIC OUTCOMES (2012, unknown): “Ellison (2005) and Gabaix & Laibson (2006) develop models of add-on and hidden pricing to explain the ubiquitous pricing contracts observed in the banking, hotel, and retail Internet sales industries.”
Competition and Price Variation When Consumers Are Loss Averse (2008, background): “Ellison (2005) and Gabaix and Laibson (2005) identify competitive advantages of making price comparisons difficult, and the model of Spiegler (2004) suggests that this could lead to price variation.”
Cognition and Incomplete Contracts (2009, background): “Committing to an incomplete contract modifies the latter’s behavior and may turn out to be beneficial (see also Glenn Ellison 2005).”
Consumer Inattention and Bill-Shock Regulation (2015, background): “I show an equivalence result: neither inattention nor bill-shock regulation affects substantive market outcomes.”
Price Discrimination and Competition (2007, methodology): “Regardless, the strategies of “paying customers to switch” [as in Chen (1997b)] or “consumer poaching” [as in Fudenberg and Tirole (2000)] can be profitable because purchase history provides a valuable instrument for the basis of dynamic third-degree price discrimination.”
The Economic Analysis of Advertising (2005, background): “Ellison and Ellison (2000) consider the behavior of pharmaceutical incumbents in the period of time that precedes the loss of patent protection. The incentive to deter entry is greatest in intermediate-sized markets, since entry deterrence is unnecessary (impossible) in markets that are sufficiently”
Price Discrimination and Imperfect Competition (2003, background): “Other related papers, covering a variety of applications, include Gal-Or (1991), Laffont and Tirole (1991), Biglaiser and Mezzetti (1993), Bond and Gresik (1996), Martimort (1996), Mezzetti (1997), Calzolari (2002), and Martimort and Stole (2003b).”
The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines (2019, unknown): “One possibility is that consumers might be more informed about, and thus have a more elastic demand, for the washer unit while treating the dryer as an “add-on” good, for which demand is less elastic, as in Ellison (2005) and Gabaix and Laibson (2006).”
How Add‐on Pricing Interacts with Distribution Contracts (2018, methodology): “Similar to the extant literature (Ellison 2005, Geng and Shulman 2015), under bundling consumers can either purchase the bundle or abstain from the market; under add-on pricing consumers can either purchase the core product only, purchase both the core product and the add-on, or abstain from the…”