Two-stage pricing for custom-made products

A commonly observed two-stage pricing strategy for a custom-made product involves a pre-purchase 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 low, the commitment solution benefits both the firm and the consumer.

► Two-stage pricing for custom-made products involves entry fee and purchase price.
► We study two settings where the firm does/does not commit to the purchase price.
► We show that without commitment, the two price points are strategic complements.
► With commitment, the two price points are strategic substitutes.
► The commitment mechanism benefits both the firm and the consumers.