The Economics of Pricing Add-on Products under Duopoly Competition

摘要

Firms often offer a variety of add-on products in addition to their core information goods. How should firms offer such add-on products? When should they offer them as a bundle versus a la carte? How does competition impact firms' bundling choice? What is the impact of regulators' decision to limit add-on pricing on consumers' surplus? Motivated by these questions, we develop an analytical model to examine asymmetric firms' bundling and pricing strategy. We identify the critical role of competition in firm's bundling decision. When there is more competition from the inferior firm, the superior firm has more incentive to bundle its add-on, even when the add-on is costly to offer. When the ratio of cost to quality is sufficiently low, the superior firm bundles as opposed to the monopoly case wherein the superior firm unbundles. We show that consumers are unlikely to be better off when add-on pricing is prohibited by regulators.