Years ago, back when MIT economist Sara Fisher Ellison was starting out, she found herself facing a typical homeowner's dilemma. She and her husband had just bought a new house in Boston, and her whole family wanted to come see it. There was no place for everyone to sleep.
Then she opened a newspaper and thought she'd found a solution: $19 mattresses on sale at a reputable store. But when she went to buy them, she instead got a lesson in real-world market economics, courtesy of a salesman.
"He explained that while I could buy the mattresses in the ad — they had them in stock — my guests wouldn't really be comfortable on them," she recalls. "Basically, this guy had been trained to try to talk me up to a higher-quality mattress."
"Upselling" — as that process is called — is a venerable strategy among merchants, undoubtedly practiced since the invention of money. Why make 5 shekels when you might be able to make 10? And, to be sure, better quality often does come at a cost.
But the emergence of the Internet as an unimaginably vast marketplace has cast a new light on upselling and other pricing strategies in which a consumer ends up paying more than he or she initially expects. On the Internet, it turns out, such sleights of merchants' hands are easy to automate — and, some economists suggest, perhaps even necessary for businesses' survival.
There's no single name for these strategies, which were labeled "drip pricing" for a conference last month at the Federal Trade Commission, borrowing a term popularized several years ago by its British counterpart, the Office of Fair Trading. Economists at the FTC conference used terms such as "obscured pricing," "shrouded pricing," and "sketchy pricing" — though that last one came from a professor who quickly noted he had an 11-year-old daughter.
Nor is there full agreement on what qualifies, though some of the sketchiness has a you-know-it-when-you-see it quality.
FTC Chairman Jon Leibowitz offered one obvious example, recounted by a staffer who had visited Egypt. After the staffer paid $20 for a camel ride into the desert to see the Pyramids, Leibowitz said, the guide asked "if he wanted to go back." That would cost another $20.
Other obvious examples include excessive fees for "shipping and handling," and various "service charges" or "regulatory recovery fees" tacked onto transactions only after a price is quoted. My personal favorite: Ticket merchants that charge for "delivery" even when you print your tickets out at home.
But what about airlines that charge for suitcases, drinks, snacks and blankets, or those that now want to charge for carry-on bags? If you know the deal ahead of time, is it drip pricing or just à la carte?
Like other economists at the FTC conference, Ellison has become intrigued by the Internet's role in price transparency — or the lack of it.
Actually, the Internet's role in this game is more than a bit ironic. In the early days of online shopping and price-comparison search engines, some economists warned that Web commerce could threaten businesses' health by trimming everybody's profits down to the bone.
The idea was that shoppers, freed from the confines of Main Street and the nearby mall, could shop at retailers or Web merchants across the country or globe. The worrisome result for merchants would be perfect, "marginal cost pricing," the theoretical point at which items sell for little or no premium above the cost to produce and distribute them.
There may be signs of that problem today, particularly in the markets for books and electronics that have faced aggressive price competition from Web merchants such as Amazon. Bricks-and-mortar survivors, such as Best Buy, worry about a phenomenon called "showrooming," in which consumers visit stores to see, handle and test products, but turn to the Web to buy them at the best prices. Even Amazon has to worry about being underbid.
But there are also counter-strategies, as Ellison and other economists noted at the FTC conference.
Ellison was interested in how retailers might respond to the spread of price-comparison engines. So several years ago, she began examining the online market for a common product: generic computer memory modules.
She found large price variation, ranging from $21 to $121, for one basic category of modules. But when she dug deeper on the price leaders' websites, what she found was reminiscent of the mattress store years ago: upselling.
Sure, she could buy the basic module. But she was consistently steered to alternatives with higher prices and, presumably, larger margins: modules with upgraded specifications, for example, or brand-name versions, or promises of free return shipping and no restocking fees.
Ellison says that for consumers, the Internet "is a double-edged sword." On one hand, they can shop far and wide for the perfect product and the best price. On the other hand, Web merchants are gaining expertise in what she calls "obfuscation strategies."
Upselling may be a survival tactic online. But Ellison is not convinced it's an effective long-run strategy for companies pushing rock-bottom prices.
"When you offer the lowest price, you basically are attracting the cheapskates — you're attracting the people who are really price-sensitive, you're getting the guys who are not going to upgrade," she says. "You want to attract more consumers. But you wish you could attract the ones who are not as price-sensitive."
Ellison says that, in essence, there may be an arms race underway on the Web between transparency and "obfuscation strategies."
What's the solution for consumers? In the United Kingdom, rules since 2008 have barred a handful of drip-pricing practices, such as touting a headline price and revealing other compulsory charges only in the purchase process. In the United States, new rules require that airfares be advertised with taxes and mandatory fees included.
But except for tactics that are plainly unfair and deceptive, such as bait-and-switch offers, there is probably little more that regulators can do — beyond calling attention to the problem and encouraging more research.
In its worst forms, drip pricing is plainly designed to obscure the real bottom line. Consumers don't demand perfection. But they can't shop knowledgeably if prices are hidden behind a veil.
Oh, and those $19 mattresses? Ellison says she got what she paid for — junk — and tossed them when her company left.
Contact Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.
