Discussion paper

DP12832 Missed Sales and the Pricing of Ancillary Goods

Firms often sell a basic good as well as ancillary ones. Hold-up concerns have
led to ancillary good regulations such as transparency and price caps. The hold-up narrative,
however, runs counter to evidence in many retail settings where ancillary good prices are set
below cost (e.g. free shipping, or limited card surcharging in countries where the “no-surcharge
rule” was lifted). We argue that the key to unifying these conflicting narratives is that the
seller may absorb partly or fully the ancillary good’s cost so as not to miss sales on the basic
good. A supplier with market power on the ancillary good market then takes advantage of
cost absorption and jacks up its wholesale price. Hold-ups occur only when consumers are
initially uninformed or naïve about the drip price and shopping costs are high. The price of
the basic good then acts as a signal of the drip price, since a high markup on the basic good
makes the firm more wary of missed sales. Regardless of whether consumers are informed,
uninformed-but-rational, or naïve, mandating price transparency and banning loss-making on
the ancillary good leads to (i) an efficient consumption of the ancillary good, and (ii) a reduction
of its wholesale price, generating strict welfare gains.


Gomes, R and J Tirole (2018), ‘DP12832 Missed Sales and the Pricing of Ancillary Goods‘, CEPR Discussion Paper No. 12832. CEPR Press, Paris & London. https://cepr.org/publications/dp12832