Missed Sales and the Pricing of Ancillary Goods

Gomes, Renato and Tirole, Jean (2018) Missed Sales and the Pricing of Ancillary Goods. The Quarterly Journal of Economics, 133 (n° 4). pp. 2097-2169.

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Official URL: http://tse-fr.eu/pub/33112

Abstract

Firms often sell a basic good as well as ancillary ones. Hold-up concerns have led to ancillary good regulations such as transparency and price caps. The hold-up narrative, however, runs counter to evidence in many retail settings where ancillary good prices are set below cost (e.g. free shipping, or limited card surcharging in countries where the “no-surcharge rule” was lifted). We argue that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good’s cost so as not to miss sales on the basic good. A supplier with market power on the ancillary good market then takes advantage of cost absorption and jacks up its wholesale price. Hold-ups occur only when consumers are initially uninformed or naïve about the drip price and shopping costs are high. The price of the basic good then acts as a signal of the drip price, since a high markup on the basic good makes the firm more wary of missed sales. Regardless of whether consumers are informed, uninformed-but-rational, or naïve, mandating price transparency and banning loss-making on the ancillary good leads to (i) an efficient consumption of the ancillary good, and (ii) a reduction of its wholesale price, generating strict welfare gains.

Item Type: Article
Language: English
Date: November 2018
Refereed: Yes
Uncontrolled Keywords: add-ons, drip pricing, missed sales, give-aways, hold-ups
JEL codes: D83 - Search; Learning; Information and Knowledge; Communication; Belief
L10 - General
L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 21 Nov 2018 11:11
Last Modified: 21 Jan 2019 13:41
OAI ID: oai:tse-fr.eu:33112
URI: http://publications.ut-capitole.fr/id/eprint/26456

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