Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Wednesday, January 13, 2021

Drip pricing and its regulation: Experimental evidence

Drip pricing and its regulation: Experimental evidence

By:

Rasch, Alexander; Thöne, Miriam; Wenzel, Tobias

Abstract:

Drip pricing is the business practice of decomposing the price into multiple components which are presented sequentially to buyers. We experimentally examine the effects of this practice on seller strategies and buyer behavior as well as the implications for regulation. Sellers set two prices: a base price and a drip price. At first, buyers only observe the base prices and make a tentative purchase decision. Revealing the sellers' drip prices, however, comes at a cost. We find that sellers only compete in base prices and set the highest possible drip price. This makes the base price a reliable indicator for the lowest total price, and few consumers invest in drip-price search. A comparison with Bertrand competition reveals significant effects: With drip pricing, consumer surplus is lower, and seller profits are higher. When there is uncertainty over possible drip sizes, sellers also compete over drips, and consumers more frequently fail to identify the cheapest offer. Bertrand competition also leads to higher consumer surplus and lower firm profits in this case. Hence, our results point to positive effects of drip-price regulation.

Date:

2020

URL:

http://d.repec.org/n?u=RePEc:zbw:vfsc20:224638&r=com

https://lawprofessors.typepad.com/antitrustprof_blog/2021/01/drip-pricing-and-its-regulation-experimental-evidence.html

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