This paper studies the pricing strategies of firms belonging to a vertical channel structure where 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 this contingent product is sufficiently profitable. The price reduction of the base product could also mitigate the double-marginalization problem, which is well known in a supply-chain setting with one manufacturer and one retailer. Competition on the contingent-product market reduces profits there. We find that this also hurts the manufacturer of the base product.
Published November 2012 , 22 pages