Pricing and diffusion of primary and contingent products

Companies in certain industries produce products, called contingent products, that must be used with another primary product. Consequently, the price of the primary product can influence the adoption of the contingent product and vice versa. In this situation, the question is, What pricing strategy should be used to set prices on the primary and contingent products to maximize the profits of the total product mix? In this paper the authors study various types of contingent product relationships and develop propositions to specify pricing strategy for primary and contingent products. An analytical investigation of these propositions provides guidelines for developing pricing strategies for primary and contingent products and challenges some beliefs regarding the relative contribution of the primary and contingent products to the overall profitability of the product mix. The present results indicate that (a) an integrated firm that produces both products should price the primary as well as the contingent product lower than two firms that independently produce each of the products (as a result, the diffusion of the two products will be faster) and (b) contrary to common belief, the firm will make more money from the primary product that from the contingent product. Managerial and public policy implications of these results are discussed.