Ticket buyers spend about 21 per cent more when faced with ‘drip pricing’ via online platforms such as StubHub, according to a major field experiment.
The study, co-authored by Berkeley Haas Prof. Steven Tadelis and forthcoming in Marketing Science, set out to better understand how drip pricing affects both the quantity and types of ticket purchases through a large-scale, real-world randomised experiment. Co-authors are Sarah Moshary of the University of Chicago; Kane Sweeney, former head of data science for StubHub and now of health-tech startup Mindstrong; and Thomas Blake, an economist and data scientist now with Amazon.
The study, ‘Price Salience and Product Choice,’ found that drip-pricing strategies, where mandatory fees are displayed at a later stage in the purchase process than base prices, meant consumers are more likely to select and purchase more expensive tickets. However, the paper does note that drip pricing can lead to site exits: “We find that consumers who are shown fees upfront drop off early in the purchase funnel, while those shown fees later are more likely to exit after the site displays total prices.”
To highlight this, Tadelis builds upon a previous experiment in price salience performed on StubHub between January 2014 and August 2015, in which the platform showed all fees upfront, so the initial prices a consumer saw when browsing ticket inventory was the final checkout price.
They consider two salience conditions under which consumers make purchase decisions: the first is the upfront fee (UF) condition, where the final purchase price including all fees is shown to consumers upfront when they search for available tickets, and the second is the back-end fee (BF) condition, where consumers observe only list prices set by sellers when searching for tickets and the fees imposed by StubHub are revealed only after the consumer proceeds to the checkout stage with a particular ticket.
It highlighted that obfuscation of fees should encourage consumers with a low willingness-to-pay for quality to switch to purchasing a ticket on StubHub, and also encourage consumers to switch from purchasing lower to higher quality tickets.
After assessing how salience affects average purchase prices, it found that BF users spend 5.42 per cent more than their UF counterparts. It also confirms that fee salience reduces revenue substantially, with consumers 13 per cent less likely to buy tickets when the full cost is laid out in the first instance.
The study also found that buyers upgrade to higher quality seats when fees are less salient, making StubHub a more attractive platform to sellers of high-quality tickets, the study finds.
The study states: “Textbook models of consumer choice assume that economic agents are rational and sophisticated in their ability to discern a product’s true price, implying that purchase decisions fully account for any fees, taxes, or add-on features. However, a growing literature demonstrates that consumers often struggle to determine final prices.”
Tadelis has also shown that when StubHub alters the consumer’s experience, it alters sellers’ behaviour, stating “salience might also affect price levels, which is hard to gauge given the unique inventory on StubHub.”
“One important question, from both the firm’s and a policy maker’s perspective, is whether consumers learn about the fees over time,” the study states. “As an example, consumers could act as if they do not anticipate fees in their ticket selection each time they visit the site. In this case, websites stand to gain substantially by shrouding fees.”
After exploring this question, results suggest that salience may be most important in markets with intermittent users as the revenue effect is 15 per cent compared to 21 per cent.
It concludes: “As the online share of transactions continues to grow, so too does the scope for regulations that guarantee the efficient functioning of markets. Chief among proposed regulations has been increasing the transparency of mandatory fees. Using data from a randomised control trial on StubHub, we find that shrouding buyer fees increases total revenue by about 20 per cent.”