Applied research leading to the regulation of drip pricing
Submitting InstitutionUniversity College London
Unit of AssessmentEconomics and Econometrics
Summary Impact TypeEconomic
Research Subject Area(s)
Economics: Economic Theory, Applied Economics
Summary of the impact
From the 1990s UCL Economics invested in the capacity to conduct
fundamental and applied research in behavioural and experimental
economics. This was the basis for the research which provided the evidence
base for the Office of Fair Trading to identify and act upon misleading
pricing practices, particularly `drip pricing', in 2010. As a result, 12
major airlines announced that they would include debit card charges in
their headline prices, and government announced that the EU-wide Consumer
Rights Directive would be implemented a year earlier than it was due to go
Experimental research on consumer decision-making builds on many years of
academic and applied work carried out at UCL. In the late 1990s Ken
Binmore (then Professor of Economics at UCL) started the dual strategy of
conducting experiments for purely academic work as well as to inform
real-world interventions at the Economic and Social Research
Council-funded Economic Learning and Social Evolution (ELSE) centre, where
often one informed the other. The most spectacular example of this was how
auction theory and experiments carried out at UCL informed the design of
the UK 3G auction in 2000, which raised an astonishing £22.5bn and
triggered much subsequent research into the design and conduct of auctions
With Steffen Huck joining UCL in 2002, the Department began to build a
larger group in experimental and behavioural economics. In the area of
consumer decision-making, the group generated a wide array of high-quality
research. For example, in 2005 researchers examined the effects of
different forms of feedback information on the performance of markets that
suffer from moral hazard problems due to sequential exchange, and found
that two-sided market transparency is an important ingredient for the
design of well-functioning markets that are prone to moral hazard [b].
Subsequent work estimated risk preferences using novel elicitation
techniques [c], and explored the consequences of competition in the
presence of behavioural biases [d]. These studies provided the academic
foundation for capacity development in consumer policy questions.
In parallel, the group developed the capacity for more applied work. For
example, Huck and Brian Wallace developed experiments to inform Ofcom on
issues such as price transparency of telephone calls or ease of switching
telecom and internet providers. Huck also co-authored the first-ever
behavioural/experimental study for the European Commission, an
investigation into retail finance titled "Consumer decision making in
retail financial services".
In 2009, the Office of Fair Trading (OFT) commissioned UCL researchers
and London Economics to investigate various ways of `framing' prices, and
the impact on consumers. UCL's Huck and Wallace designed and carried out
the study, and did the data analysis and interpretation, while London
Economics provided administrative support and contributed to the policy
implications. The study investigates six different ways of "framing"
- Standard upfront per-unit pricing (serving as a baseline);
- Drip pricing where the consumers see only part of the full price
upfront and price increments are dripped through the buying process'
- Sales in which a sale price is given and a pre-sale price is also
given as a reference to the consumer, `was £2 is now £1' (actual prices
are identical to the baseline treatment);
- Complex pricing where the unit price requires some computations, `3
for the price of 2';
- Baiting in which sellers may promote a special price but there is only
a limited number of goods actually available at that price;
- Time-limited offers where the special price is only available for a
pre-defined short period of time.
These frames were investigated in an experimental search market in the
UCL experimental laboratory where 166 consumer subjects were endowed with
a concave utility function and could buy multiple units of a good sold by
two different sellers. There were search costs (travel costs) each time a
consumer visited one of the two sellers. Each subject was confronted with
the baseline and two of the other frames, and all possible combinations of
frames were explored.
The research showed that all frames had adverse effects on consumer
behaviour and welfare, but identified drip pricing as, by far, the worst
offender, followed by time-limited offers and baiting. Drip pricing wiped
out 25% of consumer surplus relative to the baseline with straight per
unit prices shown upfront. The study also examined in close detail the
question of the external validity of its laboratory results, demonstrating
that, if anything, drip pricing would be an even bigger problem in
real-world shopping. The study was published as a working paper [e] and
written up for a policy audience in an OFT report.
In addition to Huck and Binmore, UCL researchers working in areas
contributing to the consumer agenda included Syngjoo Choi (then Assistant
Professor; now Associate Professor at UCL), Ran Spiegler (Professor at UCL
since 2006) and Brian Wallace (Senior Research Fellow; at UCL since 2006).
References to the research
[a] Binmore, K. and Klemperer, P. (2002) The biggest auction ever: The
sale of the British 3G telecom licenses, Economic Journal, 112,
C74-C96. DOI: 10.1111/1468-0297.00020.
[b] Bohnet, I., Harmgart, H., Huck, S., and Tyran, J. R. (2005) Learning
trust, Journal of the European Economics Association, 3, 322-329.
[c] Choi, S., Fisman, R., Gale, D., and Kariv, S. (2007) Consistency and
heterogeneity of individual behaviour under uncertainty, American
Economic Review, 97, 1921-1938. DOI: 10.1257/aer.97.5.1921.
[d] Spiegler, R. (2011) Bounded Rationality and Industrial
Organization. Oxford University Press, New York. Submitted to REF2.
An earlier version appeared as a policy-oriented report: Duke, C., Huck,
S., and Wallace, B. (2010) The impact of price frames on consumer decision
making, OFT Research Report 1226, http://www.oft.gov.uk/shared_oft/economic_research/OFT1226.pdf
The quality of research is demonstrated by publications [a]-[d]
in top rated peer-reviewed leading general economics journals.
Details of the impact
The OFT estimates that UK consumers spent £300 million on payment
surcharges at the ten largest airlines during 2009 alone . Upon
receiving a super-complaint from Which? in March 2011, the OFT
commissioned research into the advertising of prices, part of which was
our experimental study as described in section 2. The experimental study
[e] became the prime evidence for the OFT's new stance against drip
On 2 December 2010, OFT announced that it had identified, based on
`ground-breaking behavioural economics research' among other sources, that
drip pricing, time-limited offers and baiting sales were pricing
techniques with the potential to cause the greatest harm to consumers .
It warned that: "On drip pricing, for example, businesses that ensure all
compulsory charges are included in the headline price, and make details of
all genuinely optional charges available at the early stages of the buying
process are less likely to be subject to OFT enforcement action."
On 28 June 2011, the OFT took action on this finding, specifically in the
travel sector where abuse was felt to be most rampant. It announced that
it had put passenger travel companies "on notice to change misleading
debit and credit card surcharging practices or face enforcement action
under consumer protection laws" .
It further added: "Publishing its findings on these surcharges, following
a super-complaint from Which?, the OFT also calls for the law to
be updated to stop consumers being surcharged when buying goods and
services with any debit card."
As an immediate result, in July 2012, 12 major UK airlines (including
Easyjet and Ryanair) announced that they would include debit card charges
in their headline prices . Thus, for instance, Ryanair announced that
its £6 per flight administrative fee would be included in advertised
prices by August 2012, and in the website headline price by December. The
popularity of this move may be gauged by the fact that the news article
regarding this on the BBC website received 371 comments in a single day,
the content of which demonstrated the extreme frustration drip pricing had
caused consumers .
At this time, the EU Consumer Rights Directive, which would ban
businesses in many sectors, including the airline sector, from imposing
above-cost surcharges on any form of payment, was due to be implemented
from mid-2014. In December 2011, however, the UK government announced its
intention of becoming the first European country to ban this practice by
bringing forward its legislation. It cited the OFT recommendations based
on research as underpinning this decision .
In September-October 2012, the Department for Business, Innovation and
Skills (BIS) held a consultation on bringing the ban forward. This was
formally published on 18 January 2013 . Meanwhile, on 18 December 2012,
the Consumer Rights (Payment Surcharges) Regulations 2012 was laid before
Parliament, and came into force from 6 April 2013 .
The research and its wide coverage in the press [e.g. 8] also contributed
to public debate on drip pricing and contributed important evidence to
general public dissatisfaction with the practice. As suggested by the
number of comments on the BBC news item described above, as well as the
439 comments received at the government announcement of December 2011, the
ban was immensely popular amongst UK consumers .
The UCL research has begun to influence regulation in other countries,
notably in the United States, where the Federal Trade Commission (FTC)
held a conference on drip pricing in 2012 where the OFT's chief economist,
Amelia Fletcher, presented the work . As a result, in November 2012,
the FTC issued a warning to 22 hotel operators to stop drip pricing in the
United States .
Sources to corroborate the impact
 OFT Q&A about the surcharges super-complaint:
 OFT press release about advertising of prices study 2/10/2010:
 OFT press release about taking action in the travel sector
 BBC news report about airlines including credit card surcharges in
their headline prices 5/7/2012:
 HM Treasury press release about bringing forward legislation to
tackle excessive card surcharges 23/12/11:
 Consultation on the early implementation of a ban on above cost
payment surcharges (2/9/2012-15/10/12): https://www.gov.uk/government/consultations/consultation-on-the-early-implementation-of-a-ban-on-above-cost-payment-surcharges
 The Consumer Rights (Payment Surcharges) Regulations 2012:
 The Economist, 27/05/2010, article about the OFT study
focussing on the experimental component:
Financial Times 21/08/2010, article about the OFT study focussing
on experimental component:
 BBC news report on new legislation banning excessive card charges
with over 400 comments by readers (23/12/2011):
 FTC website about drip pricing conference held on 21/5/2012:
 FTC website about their warning to hotels and resorts, published