The Risk Signal of Price among Complementary Products: Evidence from Innovative Short-Term Insurances

The authors investigate the risk-revealing role of price in the context of complementary products, such as optional insurances (e.g., short-term insurances, product insurances or extended warranties). Based on cue utilization theory,   the study extend previous research on the dual role of price to complementary products and investigate the existence and the properties of the proposed risk signal. The study emphasizes the role of cross-product risk signals and their impact on pricing strategies and profit for retailers. Based on two empirical studies, a single choice online experiment (N = 303) and a choice-based conjoint study (N = 198), we find that: (1) the price of an optional insurance serves as a risk signal with respect to the core product and negatively affects its purchase likelihood, (2) the strength of the risk signal depends on the credibility of the inferred risk information, and (3) that risk aversion and product preferences can be used to explain choice behavior. A simulation study further explains the impact of the cross-product risk signal on retailers’ profits.