Add-On Pricing: Theory and Evidence from the Cruise Industry

Abstract

In many industries, firms give consumers the opportunity to add (at a price) optional goods and services to a baseline product. The aim of our paper is to provide a theoretical model of add-on pricing in competitive environments with two new distinctive features. First, we discuss the choice of offering the add-on, assuming that this entails a fixed cost. Second, we allow firms to have a varying degree of market power over the add-on, associated with the ability to capture the value that consumers obtain from such an additional good/service. Our model shows that the conventional wisdom, according to which offering the add-on should unambiguously lower the price of the baseline product, is not always supported. In asymmetric equilibria, in which only one firm offers the add-on, baseline prices are higher if the firm's market power over the add-on is limited. The predictions of the model are confirmed by a hedonic price model on a dataset of cruises offered worldwide.

Strategic orientation of hotels: Evidence from a contingent approach

“…Because it is a mature local tourism destination, Rimini is characterized by high levels of competition. Accommodation prices are very low, occasionally even set below cost, to attract customers and profit from aftermarket sales (Savioli and Zirulia, 2015). This established competitive market is an ideal setting for studying the strategic performance of service firms that repeatedly engage in enhancing efficiency and quality and attracting and retaining new customers/tourists.…”

Turning Discounts Into Profits: Factors Influencing Online Purchasing Decisions for Hotel Add-on Items

“…Cruise is a hospitality business that consists mostly of hedonic consumption. Selling add-on items is a critical sales strategy for business success in the cruise industry because the cruise itself provides the experience as allinclusive resorts do (Savioli & Zirulia, 2015). Compared with other hospitality products, cruise customers must rely entirely on the services and products provided by the cruise line while on board.…”

“…Compared with other hospitality products, cruise customers must rely entirely on the services and products provided by the cruise line while on board. In other words, the confounding effects of competitor's market power are minimized in the cruise line setting (Savioli & Zirulia, 2015). Therefore, the cruise industry is an ideal domain to identify what drives customers to purchase add-on items.…”