Obfuscation Strategies
- Product Proliferation: Creating many variations of similar products to complicate price comparisons.
- Hidden Add-on Costs: Making necessary add-ons (e.g., shipping, insurance) difficult to find and compare.
- Retailer-Specific Model Numbers: Assigning different model numbers to identical products across different retailers to prevent direct price comparisons.
- Opting Out of Comparison Sites: Some retailers avoid or block price-comparison websites and scraping tools.
- Drip Pricing: Displaying a low initial price while adding extra costs throughout the purchase process.
Market Implications of Obfuscation
- Price search engines and online retail intensified competition, but obfuscation counteracts this by increasing consumer confusion and complexity.
- Video games, airline tickets, and online retail are prime examples of how digital transactions have facilitated obfuscation through in-game purchases, upgrades, and hidden fees.
Empirical Evidence on Obfuscation
- The 2009 Ellison & Ellison study on computer components showed that firms use add-on pricing to attract consumers with low base prices and then push them towards upgrades.
- Price elasticity analysis indicated that firms deliberately keep base prices close to cost while making profits on upsells.
- Various studies (on auto insurance, online retail, and lab experiments) confirmed the prevalence of obfuscation and its impact on consumer decision-making.
Theoretical Insights
- Price Search Costs and Market Efficiency: Even minor search costs can lead to significantly higher prices and market inefficiencies.
- Adverse Selection: Add-on pricing selectively attracts price-sensitive customers while making upgrades expensive, leading to deadweight loss and higher overall prices.
Policy Implications and Potential Solutions
- Scoring Rules: Require firms to display standardized pricing information (e.g., APR for loans).
- Mandatory Price Disclosure: Enforce prominent disclosure of total costs, including hidden fees.
- Standardized Menus: Regulate how price components are displayed to reduce obfuscation.
- Regulation of Add-On Pricing: Set limits on excessive add-on fees (e.g., baggage fees, resort fees).
- Role of Market Intermediaries: Price-comparison platforms could enforce transparency standards, though they may struggle if consumers migrate to less transparent competitors.