Drip pricing
In
Many jurisdictions have enacted legislation to outlaw drip pricing of fees, taxes and surcharges. For example, throughout the
Effectiveness
Tversky and Kahneman’s research (1974, as cited in Ahmetoglu, Furnham, & Fagan) suggests that the reason for drip pricing being so effective is due to consumers “anchoring” on to what matter to them, for example the base price, and consider that the main factor when purchasing a product or service. They then take less recognition of the smaller prices, such as surcharges and therefore underestimate the total price as they are still considering the base price as a good deal.[5]
Xia and Monroes' research (2004, as cited in Ahmetoglu, Furnham, & Fagan) suggests that a small surcharge, for example 6% of the total price, would have a positive effect on the consumer's purchasing intentions as well as satisfaction as opposed to a high surcharge, for example 12%. However, this research also pointed out that even with the high surcharge of 12%, the consumer's purchasing intentions did not change, even if their satisfaction levels did.[5] This suggests evidence that drip pricing could be an effective pricing strategy, as it lures consumers in with a low base price and adds smaller charges, which the consumer does not recognize, as they are focused on the base price. Even if drip pricing does not have positive impact on the satisfaction levels of consumers, it is clear that a company could extract higher charges from a consumer with similar, if not same, levels of purchase intentions.
By industry sector
Airlines
Drip pricing of unavoidable additional charges on air fares is outlawed in the European Economic Area, Australia, and the United States.
The United States Department of Transportation regulation known as the Full Fare Advertising Rule[6] requiring advertisements to include all applicable taxes, fees, and return tickets took effect on January 26, 2012.[7] That July, the agency fined Tripadvisor $80,000 for non-compliance.[8] In October, 2022, USDOT proposed adding regulations for transparency on ancillary fees like baggage, and requested public comment.[9]
European regulations
In mid-2014, the
After being faced with increasing regulation of the types of surcharges that may be drip-priced, airlines have created new types of drip-priced surcharges. For example Spirit Airlines from August 2010 [18] and Wizz Air from October 2012 [19] started surcharging passengers who travel with conventionally-sized hand luggage. Following Ryanair's introduction of allocated seating in February 2014, it and other UK-based airlines have been accused of seating young children far away from their parents unless a surcharge is paid. This is despite the UK's Civil Aviation Authority guidelines stating that airlines' seat allocation procedures should aim to seat children close to their parents.[20][21]
An example of airlines' drip pricing is shown in Robbert and Roth’s (2014) research which states “You click on “Book Now” and enter your personal information. Just as you are about to finish the transaction, you see that the payment with your preferred credit card costs an additional US$20”. [22]
Event ticketing
The primary and secondary ticketing industry has faced considerable scrutiny in the United Kingdom. Many event organisers and secondary ticketing agencies, in addition to any published markup contained within the headline price, add unavoidable delivery fees for tickets later in the purchase process, even when customers print their own tickets or collect them from a box office.[23]
Hotel and resort booking agents
Cities in many southern European countries, such as Greece, Italy and Spain, impose a city tax on guests staying in hotels. Booking agents often exclude the city tax from the quoted headline price, leaving the hotel guest to pay the tax locally upon check-out.
In May 2012, the United States Federal Trade Commission hosted a conference on the economics of drip pricing, which focused on the practice of charging "hotel" or "resort" fees to consumers after they arrive to check-in at their hotel or resort.[26] Following the conference, the FTC issued letters against 22 hotel operators warning that their online reservation sites may "violate the law by providing a deceptively low estimate of what consumers can expect to pay for their hotel rooms".[27] According to the FTC letters, “One common complaint consumers raised involved mandatory fees hotels charge for amenities such as newspapers, use of onsite exercise or pool facilities, or internet access, sometimes referred to as ‘resort fees.’ These mandatory fees can be as high as $30 per night, a sum that could certainly affect consumer purchasing decisions”. The warning letters also stated that consumers often did not know they would be required to pay resort fees in addition to the quoted hotel rate.[27]
In 2017, the FTC published an extensive report which further detailed the practice of unfair and deceptive drip pricing practices in the hotel and resort industries.[28] The report found that "separating mandatory resort fees from posted room rates without first disclosing the total price is likely to harm consumers by artificially increasing the search costs and the cognitive costs of finding and booking hotel accommodations."[28]: 37
Airbnb
When
Economy-wide regulations
In October 2022, the United States Federal Trade Commission announced a proposed rulemaking on the practice, and requested public input.[32]
Ethics
“We find that that consumers perceive drip prices as unfair.” (Robbert & Roth, 2014) This is the issue when it comes to price drip strategy. Is it fair to show a lower price and slowly add additional costs towards the end of a transaction? Robbert and Roth’s research (2014) goes on to show that consumers disapprove of the way that the prices are being presented. This can have a negative impact on the purchase itself as if consumers feel they are being treated unfairly due to drip pricing strategy, they may consider substitute goods and services.[22]
Economic effects
Even under the circumstances of fully rational consumers and suppliers, consumers are harmed for industry benefit. The main discredit of this strategy isn't firms using this tactic in order to gain an advantage over other firms, but rather it increases the "consumer's cost to searching elsewhere".[33]
Search friction inhibits consumers from obtaining sufficient market information to make an informed decision, an effect which is amplified by drip pricing. When drip pricing is employed, a competitive market is insufficient to mitigate the additional search friction consumers experience. Drip pricing is a method used to isolate and restrict competitive forces to the base price only, with minimal competition influence on additional charges.[34]
See also
References
- ^ "What Is Partitioned Pricing, the Subject of Recent Regulatory and Litigation Scrutiny?". The National Law Review. Retrieved 24 October 2023.
- ^ Fletcher, Amelia (21 May 2012). "Drip pricing: UK experience" (PDF). Federal Trade Commission. Office of Fair Trading. Retrieved 21 August 2015.
- Australian Competition & Consumer Commission. Retrieved 21 August 2015.
- ^ Safi, Michael (19 June 2014). "Virgin Australia and Jetstar face legal action over 'drip pricing'". The Guardian. Retrieved 21 August 2015.
- ^ .
- 14 CFR 399
- ^ https://www.frommers.com/tips/airfare/new-dot-rules-take-effect-airlines-must-now-include-taxes-in-airfare-ads New DOT Rules Take Effect: Airlines Must Now Include Taxes in Airfare Ads
- ^ Martin, Hugo (July 13, 2012). "TripAdvisor fined for violating airfare advertising rule". Los Angeles Times. Archived from the original on February 26, 2020. Retrieved January 17, 2020.
- ^ Procedural Information Regarding Enhancing Transparency of Airline Ancillary Service Fees Notice of Proposed Rulemaking
- ^ Article 23 of Regulation (EC) No 1008/2008
- ^ Consumer Rights (Payment Surcharges) Regulations 2012
- ^ "Excessive card surcharges will be banned, says Treasury". BBC News. 23 December 2011. Retrieved 21 August 2015.
- ^ "Airlines include debit card charges in headline price". BBC News. 5 July 2012. Retrieved 21 August 2015.
- ^ Article 62(4) of Directive (EU) 2015/2366 (Payment Services Directive)
- ^ Regulation 6A(1) of the Consumer Rights (Payment Surcharges) Regulations 2012
- Sydney Morning Herald. Retrieved 21 August 2015.
- Australian Competition & Consumer Commission. 19 June 2014. Retrieved 21 August 2015.
- ^ Jones, Charisse (2010-04-07). "Spirit Airlines to charge a $20–$45 fee for carry-on bags". USA Today. Retrieved 2015-08-31.
- ^ "Wizz Air launches new cabin baggage policy". Wizz Air. 3 October 2012. Archived from the original on 15 June 2015. Retrieved 13 June 2015.
- ^ Hayward, Stephen (25 April 2015). "Airlines charging families an extra £88 just so parents can sit with their children". Daily Mirror. Retrieved 31 August 2015.
- ^ "Information on how an airline may allocate seats and what restrictions may apply". Civil Aviation Authority. Retrieved 31 August 2015.
- ^ ISSN 1061-0421.
- ^ "Can I avoid hidden ticket charges?". Which?. Retrieved 30 August 2015.
- ^ "The trick of Booking.com with city tax". TravelDailyNews International. 4 July 2014. Archived from the original on 8 July 2014. Retrieved 31 August 2015.
- ^ Smith, Oliver (1 September 2014). "Rome doubles hotel tax". The Telegraph. Retrieved 31 August 2015.
- ^ "FTC Transcript: A Conference on the Economics of Drip Pricing" (PDF). FTC.gov. May 21, 2012.
- ^ a b "FTC Warns Hotel Operators that Price Quotes that ExcluDe 'Resort Fees' and Other Mandatory Surcharges May Be Deceptive". US Federal Trade Commission. November 28, 2012. This article incorporates text from this source, which is in the public domain.
- ^ a b "Economic Analysis of Hotel Resort Fees". Federal Trade Commission. 2017-01-05. Retrieved 2018-07-06.
- ^ "Airbnb and eDreams give undertakings to ACCC for improved pricing practices". Retrieved 2 April 2016.
- ^ Han, Esther (13 October 2015). "Airbnb and eDreams forced to declare mandatory fees after ACCC crackdown". Retrieved 2 April 2016.
- ^ Boffey, Daniel (16 July 2018). "Airbnb warned it breaches EU rules over pricing policy". The Guardian. Retrieved 1 August 2018.
- ^ Unfair or Deceptive Fees Trade Regulation Rule Commission Matter No. R207011
- ^ Morgan, John; Baye, Michael R. (March 2019). Search Costs, Hassle Costs, and Drip Pricing: Equilibria with Rational Consumers and Firms (PDF). Retrieved 24 October 2020.
- ISBN 9783863042967. Retrieved 24 October 2020.
Further reading
- Bainbridge, Amy (February 21, 2014). "ACCC puts businesses on notice over 'drip pricing'". ABC News. Retrieved August 30, 2015.
External links
- Drip pricing at Investopedia
- "Drip pricing the greatest threat to consumer understanding, says OFT". Out-Law.com. Pinsent Masons. 2 December 2010. Retrieved 21 August 2015.