Optional-Contingent-Product Pricing in Marketing Channels

This paper studies the pricing strategies of firms belonging to a vertical channel structure where a base and an optional contingent products are sold. Optional contingent products are characterized by unilateral demand interdependencies. That is, the base product can be used independently of a contingent product. On the other hand, the contingent product’s purchase is conditional on the possession of the base product.

We find that the retailer decreases the price of the base product to stimulate demand on the contingent-product market. Even a loss-leader strategy could be optimal, which happens when reducing the base product’s price has a large positive effect on its demand, and thus on the number of potential consumers of the contingent product. The price reduction of the base product either mitigates the double-marginalization problem, or leads to an opposite inefficiency in the form of a too low price compared to the price maximizing vertically integrated channel profits. The latter happens when the marginal impact of both products’ demands on the base product’s price is low, and almost equal in absolute terms.

Joint work with Sihem Taboubi and Georges Zaccour