Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2020-09-15
Number: 20-060/VI
Author-Name: Branko Boskovic
Author-Workplace-Name: University of Alberta
Author-Name: Sacha Kapoor
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Agnieszka Markiewicz
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Barry Scholnick
Author-Workplace-Name: University of Alberta
Title: Cyclicality of Add-on Pricing: Evidence from Extended Warranties
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 procyclicality 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.
Classification-JEL: E30, L81
Keywords: Add-on pricing, business cycles
File-URL: https://papers.tinbergen.nl/20060.pdf
File-Format: application/pdf
File-Size: 1138051 bytes
Handle: RePEc:tin:wpaper:20200060