This paper studies the effect of introducing a vertical differentiation strategy through sales of upgrades to a new type of premium product on the firm's price dispersion arising from its use of price discrimination for the base product. As a relevant application, we examine, both analytically...

We consider a setting where the firm sells a main service (e.g., air travel) and an ancillary service (e.g., in-flight meal) to two types of consumers (high-type and low-type, e.g., business travelers and leisure travelers). The firm decides whether to unbundle the ancillary service from the...