Fee or Free? How Much to Add on for Add-ons?

Fruchter, Gila E., Gerstner, Eitan and Dobson, Paul W. (2011) Fee or Free? How Much to Add on for Add-ons? Marketing Letters, 22 (1). pp. 65-78.

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Abstract

Sellers often provide complimentary “no extra charge” add-ons (e.g., free Internet connection) to consumers who buy their primary products (e.g., a hotel stay), but recently add-ons that used to be free are offered for a fee. The conventional wisdom is that unadvertised add-ons for high fees help competitors increase profits that are competed away by advertising low prices for the basic products. This theory cannot explain why complimentary add-ons are still offered by some sellers. We show that providing complimentary add-ons can be profitable for sellers with monopoly power under certain demand conditions. If these demand conditions are not met, it is optimal to charge a supplementary fee for the add-on. We also show how pricing policy can be designed to selectively target or deter different consumer segments from purchasing the add-on to boost sellers’ profits, providing a strategic role for selling add-ons at either below-cost or at exorbitantly high prices. Yet such behavior may have repercussions for economic welfare when it results in socially inefficient giveaways when consumers would be better served with a lower price on the basic product without the add-on or, with the other extreme, when it results in excessively high prices for an add-on that restricts sales and leads to its under-provision from a societal perspective. The paper also provides managerial insights on the design and use of add-ons.

Item Type: Article
Faculty \ School: Faculty of Social Sciences > Norwich Business School
Depositing User: Vishal Gautam
Date Deposited: 13 Jan 2011 10:40
Last Modified: 24 Jul 2019 13:29
URI: https://ueaeprints.uea.ac.uk/id/eprint/19178
DOI: 10.1007/s11002-010-9112-3

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