Product line rivalry and market segmentation - With an application to automobile optional engine pricing

This paper addresses the questions whether and when the pricing practices o n base products may differ from those of premium products, sold with option s or add-ons. Various alternative models are considered: a monopoly model, a model of brand rivalry with full consumer information and a model of riva lry in which consumers are only well informed about base product prices. On ly the brand rivalry model with limited consumer information predicts that premium products have larger percentage markups than base products, provide d that brand rivalry is sufficiently intense. Empirical evidence on base an d premium product pricing in the automobile market is consistent with the l imited information model and inconsistent with the other two models.