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Research Highlights

Successful Selling May Mean More Fine Print

By Xavier Gabaix, Professor of Finance and Martin J. Gruber Chair in Asset Management

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The research shows companies that educate consumers about actual pricing structures may do them, or at least some of them, a favor, but it doesn’t help the company.

“Buyer beware” is a timeworn phrase, but with today’s consumers, awash in information, “seller beware” is rapidly gaining legitimacy. JC Penney recently launched a strategy of straightforward, no-gimmick pricing, and it’s apparently a non-starter, as the company’s revenues and shopper traffic were sharply down after the change. If Penney execs had only boned up on research by NYU Stern Professor of Finance Xavier Gabaix, they may never have attempted to come clean on pricing.

In “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,” Gabaix and Harvard University Professor of Economics David Laibson investigated the traditional commercial practice of not telling the whole truth about high-priced add-ons up front and whether that benefits either the companies or their customers. Typical details that businesses often hide or “shroud” in fine print might include, for instance, the real cost of ink cartridges for computer printers or how much a hotel stay really costs when telecom, Internet, and minibar charges and other options are toted up.

How consumers deal with the information they are given varies according to their level of sophistication, the authors found. If a hotel were to come clean on the cost of the house phone and the parking, for instance, sophisticated consumers might profit from that additional information and elect less expensive alternatives, such as their cell phone and a taxi rather than a rental car. So, while they still may patronize the hotel, they’ve cut their costs at the hotel’s expense. In contrast, less discriminating guests might be put off by what appear to be “extra” charges and choose a competitor that doesn’t put all its cards on the table.

Thus, the research shows, companies that educate consumers about actual pricing structures may do them, or at least some of them, a favor, but it doesn’t help the company. “No firm can ever capture or even partially share these benefits,” says Gabaix.