Consumer Naivete and Competitive Add-on Pricing on Platforms

We model a situation where two sellers trade vertically and horizontally differentiated goods on a platform for which they are charged a commission fee. Sellers' costs are asymmetric due to differences in the fees charged by the platform and in their costs of production. Consumers purchase either a base good, or a bundle comprising of the base good and an add-on, from one of the sellers on the platform. Consumers differ in their brand preferences, valuations of quality and in their levels of sophistication. More specifically, we assume that there is a fraction of consumers who are naive, and do not observe or consider add-on prices - possibly because they do not foresee their demand for an add-on - until after they have committed to buying the base good from a seller. We examine how the interplay of these forces shapes consumer behavior, sellers' pricing strategies and cost pass-through, and platform fees and revenues