Applied research leading to the regulation of drip pricing
16 December 2014
Experimental economics research at UCL provided evidence for the Office of Fair Trading to identify and act upon misleading pricing practices, particularly 'drip pricing'. Twelve airlines subsequently began including debit card charges in headline prices and government implemented the Consumer Rights Directive a year earlier than planned.
The Office of Fair Trading (OFT) estimates that UK consumers spent £300 million on payment surcharges at the 10 largest airlines in 2009 alone. In 2011, the consumer advocacy magazine Which? filed a super-complaint with the OFT, which commissioned an experimental study at UCL.
UCL Economics has a long history of successful experimental research on consumer decision-making. In 2000, its research on auction theory led to the design of the UK's 3G auction for mobile phone spectrum licenses, which raised an astonishing £22.5 billion.
Working with London Economics, Professor Steffen Huck and Dr Brian Wallace (UCL Economics) designed and conducted a series of experiments to assess the effects of various kinds of price 'frames' on consumers. For example, in drip pricing consumers see only part of the full price upfront and additional charges or increments are added on through the buying process (e.g. credit card surcharges), while 'complex pricing' is where the unit price requires the buyer to perform calculations ('3 for the price of 2'). The experiment found that all frames had adverse effects on consumers, but the worst was, by far, drip pricing. These results were presented to OFT.
As an immediate result, OFT put travel companies on notice to change misleading debit and credit card surcharges in 2011. The following year, 12 major airlines (including EasyJet and Ryanair) announced that they would include debit card charges in their headline prices, benefiting thousands of UK and overseas travellers.
At the time, the EU Consumer Rights Directive aimed against many above-cost surcharges, was due to be implemented in 2014. Following the OFT action based on UCL research, however, the UK government announced that it would bring forward its legislation by a year. Other countries also took notice: the OFT's chief economist subsequently presented the work at a United States Federal Trade Commission conference, and 22 US hotel operators were subsequently sent official warnings to stop drip pricing.
This study and its impact on policymakers is an example of the power of experimental economics which still remains underutilized in consumer protection. - Professor Steffen Huck
Research was commissioned and funded by the OFT and carried out in conjunction with London Economics.