A Survey on Drip Pricing and Other False Advertising

Abstract

Drip pricing arises when a firm initially advertises a low price, then reveals additional fees as the consumer advances through the purchase process. We give examples of firms that have been pursued for engaging in drip pricing. We summarize theoretical papers on the topic, emphasizing the importance of whether drip prices are optional or mandatory, as well as the degree of consumer sophistication. We also discuss empirical papers which examine how consumers respond to drip pricing, and which examine how the ability to do drip pricing affects firm profitability. False advertising arises when firms make false claims about the “quality” of their product, which in turn cause consumers to pay more than they otherwise might. We give examples of firms that have been pursued for making such false claims. We summarize theoretical papers on the topic, emphasizing that it may not be optimal for consumers or society to impose very large fines for false advertising. For example, we argue this can be true when consumers are sophisticated and the market is relatively healthy. We also discuss empirical evidence which shows that false advertising can affect consumers’ purchase behavior, and that firms are more likely to use it when the returns are higher.

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Reference

Andrew Rhodes, “A Survey on Drip Pricing and Other False Advertising”, TSE Working Paper, n. 23-1434, May 2023.