Price Complexity in Laboratory Markets

This paper provides new insights on how price complexity may affect markets for consumer goods. We report on two laboratory experiments that investigated the effects of price complexity on market outcomes. The experiments had human participants interact in basic markets. Across experiment sessions, the experiments varied how complex sellers were allowed to make their prices. In treatment 1, sellers could describe their price only using a single number. In treatment 2, sellers described their products using up to eight “sub-prices,” prices that added up to one total price. And, in treatment 3, sellers could use up to sixteen sub-prices. On average, we found that allowing more complex pricing led sellers to ask for higher total prices and buyers to make more mistakes (choosing higher-priced offerings). These effects translated into higher average transaction prices. Using data from our experiments to fit a model of seller behavior, we find that allowing sellers to use complex pricing disrupts the standard market equilibrium in which sellers compete for buyers by setting prices equal to their marginal cost of production. Instead, when prices are low, sellers can expect higher profits by raising both their total price and the complexity of their price.

In a second experiment, we investigated the effects of increased competition on market outcomes. On average, we found that increased competition generally improved, but did not eliminate, the negative effects of price complexity.

FULL REPORT

Price Complexity in Laboratory Markets

Related resources

CFPB Publishes Research Finding Higher Price Complexity Leads Consumers to Pay More