Drip pricing and its regulation: Experimental evidence

Abstract

This article analyzes the effects of drip pricing, the business practice of decomposing a price into multiple components that are presented sequentially to buyers. We experimentally examine the effects of this practice on seller strategies and buyer behaviors, and we assess the implications for regulation. In our experiment, sellers set two prices: a base (or headline) price and a drip price. At first, buyers observe only the base prices, and make a tentative purchase decision. Subsequently revealing the sellers drip prices, however, comes at a cost to buyers. We find that sellers only compete on base prices, and thus set the highest possible drip price. This makes the base price a reliable indicator for the lowest total price. Moreover, few consumers invest in drip-price searches. 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.