Fee or free? How much to add on for an add-on

Gila E. Fruchter, Eitan Gerstner, Paul W. Dobson

Research output: Contribution to journalArticlepeer-review

31 Scopus citations

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.

Original languageEnglish
Pages (from-to)65-78
Number of pages14
JournalMarketing Letters
Volume22
Issue number1
DOIs
StatePublished - Mar 2011

Bibliographical note

Funding Information:
Acknowledgments The authors would like to thank the Editor, Joe Urbany, and an anonymous reviewer for their insightful suggestions as well as Chris Wilson for helpful comments. The financial support of the Economic and Social Research Council (grant number RES-000-22-3524) is gratefully acknowledged.

Keywords

  • Add-ons
  • Complimentary service
  • Pricing
  • Supplementary fee

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