Add-On Pricing: A Queueing Perspective

Abstract

This work is motivated by the practice of add-on services, where an add-on is not valuable unless purchased with a main service. Discrepancies in pricing have been observed in various settings such as restaurants, museums, and attractions regarding whether the add-on should be sold together with the main service, or separately from the main service at an additional charge. While there has been a vast literature on add-on pricing, its application in service-oriented businesses with congestion-prone externalities and delay-sensitive customers is less understood. We develop a queueing model and examine the optimal pricing of add-on services in such systems, and in line with practice, we focus on analyzing two pricing schemes: bundling that charges a single price to sell main and add-on services altogether, and separate selling that charges distinct prices for each service. We establish that in the absence of congestion, separate selling strictly dominates bundling across the board. When there is congestion at the main service but not the add-on, bundling can be more lucrative under a large customer demand. When congestion takes place at both services, separate selling can return to being dominant under a large customer demand. We explain these plots of reversals by illustrating an intricate interplay between pricing, market coverage, and congestion. Collectively, they reveal novel operational advantages of each pricing scheme in exploiting the fundamentals of add-on structures.