Two-Stage Pricing for Custom-Made Products

24 Pages Posted: 16 Dec 2009 Last revised: 31 Mar 2011

See all articles by Ernan Haruvy

Ernan Haruvy

University of Texas at Dallas - Naveen Jindal School of Management

Tao Li

University of Texas at Dallas - Naveen Jindal School of Management

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: October 12, 2010

Abstract

A commonly observed two-stage pricing strategy for a custom-made product involves a prepurchase entry fee for a potential consumer and a purchase price if he decides to buy the product. We solve and compare two settings: In the first, the firm does not commit in advance to the second-stage price and in the second, the firm does. We show that without a commitment mechanism, the two price points are strategic complements, in that the higher pre-product fee implies a higher post-product price. With commitment, the two price points are strategic substitutes and the firm can improve profit over the no-commitment case by offering a low purchase price in the second stage and extracting the surplus through an entry fee. When the production cost is sufficiently low, the commitment solution benefits both the firm and the consumer.

Keywords: marketing, pricing, games, custom-made products, personalized products, two-stage pricing, quality, product quality, Nash equilibrium, time inconsistency, substitutes, complements, commitment, no commitment, consumer surplus, service management, capacity constraints, multi-agent systems

JEL Classification: C61, C72, D4, D82, E2, L11, M31, M11, M21

Suggested Citation

Haruvy, Ernan and Li, Tao and Sethi, Suresh, Two-Stage Pricing for Custom-Made Products (October 12, 2010). Available at SSRN: https://ssrn.com/abstract=1522953 or http://dx.doi.org/10.2139/ssrn.1522953

Ernan Haruvy

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Tao Li

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

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