Consumers bamboozled by retail pricing, finds OFT research

The OFT is investigating pricing methods, many of which are heavily used in online shopping, in a bid to find out if it should more closely regulate them. It reported last week on behavioural advertising, and will issue a full report on pricing in autumn.

It has published some of the research on which it will base its decisions on further regulation. In one study, researchers compared consumers' behaviour when faced with straightforward 'per unit' pricing, and that when faced with more complicated pricing.

It found that 'consumer detriment' – which could be paying higher prices for goods or buying those which are less suitable – was higher with more complicated pricing methods.

More complex pricing methods include some that have become popular in online retail, such as drip pricing, where additional charges are added to a basic price as the sales process progresses, or 'baiting', where only a small number of products are available very cheaply to tempt users to shop with a particular company.

The research found that the pricing strategy that caused most harm to consumers was drip pricing. Time limited offers and baiting were the strategies that cause the next poorest decisions, it found.

"We observe that drip pricing and time-limited offers which generated the biggest welfare losses are also the price frames in which subjects make the most errors," said the research, which was produced by London Economics and University College London (UCL). "The most prevalent error under these two price frames is that subjects buy at the first shop at prices that are too high, that is, at prices where they should continue their search."

The research, which involved exposing people to per-unit prices for goods and to a range of other pricing methods and measuring buying behaviour, found that drip pricing was effective because of its psychological effects.

"If a consumer sees a low base price and they make the decision to buy the good, they shift their reference point because they imagine already possessing the good," it said. "Later, when they realise that there are additional costs and charges, it is thus more difficult for them to give up the good which they already have 'in their basket'. Therefore, they purchase the good despite the increase in price."

"Subjects reported in the questionnaire feeling disappointed in this frame because they felt they were receiving a good deal when they saw the base price," it said. "Subjects reported that they still bought the good after they found out the additional charges, but felt cheated and annoyed because their pay-off was reduced."

Another piece of OFT-commissioned research found that pricing had a major effect on consumers in an area where they could have been expected to act more rationally.

"While classical economic theory suggests that people will act rationally, using cost benefit analysis to make choices, scientific research shows that this is not the case," said a report into pricing practices produced by the University of London (UL) and Mountainview Learning. "Humans do not have the capacity to recognise and evaluate all the available information in today’s complex environment, nor the time or motivation. Instead, people use mental short-cuts … to deal with this complexity."

Those short cuts can be exploited by retailers to extract higher prices from consumers, it found. But though some of the pricing strategies are used online, the research also found that internet shoppers might be better placed to resist their effects than other kinds of shoppers.

"Research suggests that pricing practices may be less effective in conditions where consumers are readily able to make memory based price comparisons, or have quick and easy access to price information, such as in online environments," said the UL/Mountainview report. "On the other hand, pricing cues put forward by sellers both online and offline may still influence consumer behaviour, indicating that learning and/or easy access to information does not eliminate the impact of these practices."

The OFT will use the research in deciding how the Consumer Protection from Unfair Trading Regulations (CPRs) might be applied to pricing strategies.

"Clarity about how the law applies, and the OFT's view on the benefits and potential harm from the different ways retailers advertise prices, will help businesses and consumers in what sometimes can be a contentious and rapidly changing area," said the OFT's Heather Clayton. "We are about half way through the study, which is due to end in the autumn, so we are very keen to receive comments from retailers and consumer groups."