Add-on Pricing over Regional Business Cycles: Evidence from Extended Warranties

Tinbergen Institute Discussion Paper 2020-060/VI

46 Pages Posted: 4 Nov 2020

See all articles by Branko Bošković

Branko Bošković

University of Alberta - Department of Marketing, Business Economics & Law

Sacha Kapoor

Erasmus University Rotterdam; Erasmus University Rotterdam

Agnieszka Markiewicz

Erasmus University Rotterdam (EUR); Tinbergen Institute

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law

Date Written: July 17, 2020

Abstract

What explains apparent price rigidity over the business cycle? This paper shows that price fluctuations may be hidden in prices of add ons. Using 10 years of extended warranty data from a nationwide Canadian retailer, we show that extended warranty prices respond strongly to changes in local economic activity whereas prices of underlying durable goods do not. The pro-cyclicality is driven by a shift in price setting behavior, where local stores use extended warranty discounts to make base durable demand less price elastic and, as a result, increase sales of durable goods. Discounts on extended warranties were especially sharp during the Great Recession.

Keywords: add-on pricing, business cycles

JEL Classification: E30, L81

Suggested Citation

Bošković, Branko and Kapoor, Sacha and Markiewicz, Agnieszka and Scholnick, Barry, Add-on Pricing over Regional Business Cycles: Evidence from Extended Warranties (July 17, 2020). Tinbergen Institute Discussion Paper 2020-060/VI, Available at SSRN: https://ssrn.com/abstract=3693249 or http://dx.doi.org/10.2139/ssrn.3693249

Branko Bošković (Contact Author)

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

Sacha Kapoor

Erasmus University Rotterdam ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

HOME PAGE: http://people.few.eur.nl

Erasmus University Rotterdam ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

HOME PAGE: http://people.few.eur.nl

Agnieszka Markiewicz

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

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