Free Add-Ons in Services

The paper examines a seller’s offering of free add-ons in services. We build a stylized model where the seller decides the level of add-on provision to enhance its core service, and consumers make discrete choices between the seller and an outside option. When the seller supplies its service through a single channel, we show that the optimal add-on provision is unimodal in the difference between the seller’s service quality and the outside option, comparable with the existing literature. When the service is supplied through multiple channels, we show that the seller may make nonidentical add-on provisions among channels. If the cost of add-on provision is low, the seller should adopt a differentiation strategy. If the cost is high, the seller should adopt a homogenization strategy. Various extensions are considered to establish the robustness of our results.