The Economics of Drip Pricing at the FTC

Josh Wright —  7 May 2012

The FTC is having a conference in the economics of drip pricing:

Drip pricing is a pricing technique in which firms advertise only part of a product’s price and reveal other charges later as the customer goes through the buying process. The additional charges can be mandatory charges, such as hotel resort fees, or fees for optional upgrades and add-ons. Drip pricing is used by many types of firms, including internet sellers, automobile dealers, financial institutions, and rental car companies.

Economists and marketing academics will be brought together to examine the theoretical motivation for drip pricing and its impact on consumers, empirical studies, and policy issues pertaining to drip pricing. The sessions will address the following questions: Why do firms engage in drip pricing? How does drip pricing affect consumer search? Where does drip pricing occur? When is drip pricing harmful? Are there efficiency justifications for the practice in some situations? Can competition prevent firms from harming consumers through drip pricing? Can consumer experience or firm reputation limit harm from drip pricing? What types of policies could lead to improved consumer decision making and under what circumstances should such policies be applied?

The workshop, which will be free and open to the public, will be held at the FTC’s Conference Center, located at 601 New Jersey Avenue, N.W., Washington, DC. A government-issued photo ID is required for entry. Pre-registration for this workshop is not necessary, but is encouraged, so that we may better plan for the event.

Here is the conference agenda:

8:30 a.m.   Registration
9:00 a.m. Welcome and Opening Remarks
Jon Leibowitz, Chairman, Federal Trade Commission    
9:05 a.m. Overview of Drip Pricing
Mary Sullivan, Federal Trade Commission  
9:15 a.m. Consumer and Competitive Effects of Obscure Pricing
Joseph Farrell, Director, Bureau of Economics, Federal Trade Commission
9:45 a.m.  Theories of Drip Pricing
Chair, Doug Smith, Federal Trade Commission
[Presentation] David Laibson, Harvard University
[Presentation] Michael Baye, Indiana University
[Presentation] Michael Waldman, Cornell University
[Comments] Discussion leader
Michael Salinger, Boston University
11:15 a.m.  Morning Break
11:30 a.m.  Keynote Address
Amelia Fletcher, Chief Economist, Office of Fair Trading, UK
12:00 p.m Lunch
1:00 p.m. Empirical Analysis of Drip Pricing
Chair, Erez Yoeli, Federal Trade Commission
Vicki Morwitz, New York University
Meghan Busse, Northwestern University
Sara Fisher Ellison, Massachusetts Institute of Technology
[Comments] Discussion leader
Jonathan Zinman, Dartmouth College
2:30 p.m. Afternoon Break
2:45 p.m. Public Policy Roundtable
  Moderator, Mary Sullivan, Federal Trade Commission

Michael Baye, Indiana University

Sara Fisher Ellison, Massachusetts Institute of Technology

Rebecca Hamilton, University of Maryland
  David Laibson, Harvard University
  Vicki Morwitz, New York University
  Michael Salinger, Boston University
  Michael Waldman, Cornell University
  Florian Zettelmeyer, Northwestern University
  Jonathan Zinman, Dartmouth College
3:45 p.m.  Closing Remarks

One response to The Economics of Drip Pricing at the FTC


    Sounds pernicious. Not. Of course, everyone who has bought $8.00 popcorn at the movies will support the eradication of this practice, so Congress will doubtless get involved. Probably around, say, October this year. But why isn’t it, presumably among many other things, at least for non-mandatory charges, simply welfare-increasing price discrimination? Note, also, that as long as the FTC doesn’t also shut down Google, one can probably always find out about such practices with ease, and I seriously doubt reputation, repeat play and general consumer experience are absent forces here. Ah — I’m sure the behavioralists can explain why we’re all spending above our reservation prices as a result of this practice. Perhaps relative to some theoretical utopian alternative (with, no doubt, higher up-front prices) consumer search costs are a little higher, but critics don’t seem to mind raising consumer search costs in the name of reining in Google or protecting privacy or limiting data agglomeration, among other things. And if it makes pricing less transparent and/or less homogenous, it would have the added benefit of reducing coordinated effects in some places. I presume the implicit theory of harm is that it reduces price competition, and I suppose this is a back-door into going after tying (Xerox lives!) and even perhaps that evil of all ill-defined evils, “leveraging of dominance.” But thankfully things like the Schumer Box and the Airline Passenger Bill of Rights will save us. Free (not) shipping for all! Anyway, I can see it now – we will be saved from this scourge by some variant of post and hold laws that will ensure we are not blind-sided — and will ensure that collusion is government mandated.