The price does not include additional taxes, fees, and surcharges: A review of research on partitioned pricing

Abstract

In the past two decades, pricing research has paid increasing attention to instances where a product's price is divided into a base price and one or more mandatory surcharges, a practice termed partitioned pricing. Recently, partitioned pricing strategies in the marketplace have become more pervasive and complex, raising concerns that consumers do not always fully attend to or process all price information, and underestimate total prices, which in turn influences their purchasing behavior. Thus, understanding how partitioned prices affect consumers is of increasing interest to consumer researchers, public policy makers, and marketing managers. This paper reviews and organizes the academic literature on partitioned pricing and proposes an agenda for future research. We focus on the psychological processes underlying partitioned pricing, to help these three constituencies understand how partitioned pricing works, the mechanisms by which it exerts its impact, and the appropriate areas where the practice may need regulation to protect consumers.

Introduction

A considerable amount of research has studied how consumers react to prices that are divided into two or more mandatory parts and presented to consumers as a base price and one or more mandatory surcharges, a practice known as partitioned pricing (abbreviated here as PP). PP is distinct from all-inclusive pricing (abbreviated as AIP) which involves the use of single, all-inclusive price that covers all costs. Examples of PP surcharges include airline fuel surcharges, shipping and handling charges, hotel resort fees, and the buyer's premium paid by winning auction bidders. With PP the base price and mandatory surcharges are typically associated with the purchase of a single product or service. This differentiates PP from price bundling, where consumers purchase multiple products at the same time, for one price, and cannot split the bundle and buy only a subset of the products.

The questions of how consumers react to PP, and how their reactions differ from those to AIP, are becoming of greater interest. In recent years the use of PP in the marketplace has increased, and firms' PP strategies have become more complex and sophisticated, often making it more difficult for consumers to accurately process PP. Indeed, it can be argued that for most online shopping, as well as many important purchases such as cellular phone services, cable television, and travel, PP is now the norm, rather than AIP. This trend of growth and increased complexity in PP places greater demands on three key constituencies. Consumer researchers need to understand reactions to PP to help obtain a comprehensive view of consumer reactions to price. Public policy makers have become more concerned about the potential for PP to mislead consumers and thwart competition, and have increased regulatory and legislative action regarding PP to protect consumers, while lawyers and judges must understand PP to properly participate in the many legal cases involving the practice, brought by government entities and even by consumers. Lastly, marketing managers must have a thorough understanding of how PP affects consumers, and how to use it not only effectively, but also ethically.

Since the first academic investigation of consumer reactions to PP appeared in the late 1990s (Morwitz, Greenleaf, & Johnson, 1998), numerous articles examining PP have appeared in a wide range of disciplines — marketing, psychology, economics, finance, and law. Hamilton, Srivastava, and Abraham (2010) discuss and use some of this research in a “benefits based” managerial decision framework outlining how PP may increase the perceived value of an offering by partitioning the prices of product components with high-perceived benefits. However, there is still a need for a comprehensive review of the psychological processes that motivate consumer responses to PP. Such an inquiry can help the constituencies just mentioned to better understand why PP has the impact it does, to manage that impact, and to assess when that impact is in the public interest as opposed to when PP can mislead consumers. Furthermore, a review of the psychological processes underlying PP points to important unanswered questions and highlights avenues for future research.

Accordingly, this paper has four objectives: i) to discuss recent trends in PP in practice, to convey the increasing complexity that consumers—and thus consumer researchers, policy makers, and managers—must contend with when forming research, policy, and decisions for PP; ii) to introduce readers to the literature describing the wide impact that PP has in the marketplace, not only on price perceptions and demand, but also on key variables such as brand attitudes, fairness perceptions, and search intentions; as well as the key moderators of PP effects; (iii) to propose an organizing framework of the psychological processes responsible for PP's impact on consumers; and (iv) to propose an agenda for future research in PP, focusing on key unanswered questions, and under-researched areas in the proposed framework just discussed.

PP is one of several related pricing strategies that tend to make the total cost to purchase a product less transparent and more difficult to process. In “drip pricing,” some charges are revealed only after the purchase, so that consumers may underestimate the total cost at the time of purchase (Hamm, 2013, February 10, Shelanski et al., 2012). Sometimes firms use “shrouded attributes” (Gabaix & Laibson, 2006)—whose prices, and even whose existence, is not readily evident to consumers. With “price obfuscation,” (Ellison & Ellison, 2009) firms make prices difficult to process and to compare (Chioveanu & Zhou, 2013). “Price complexity” (Carlin, 2009) involves not only PP, but also introducing new terminology for price components that consumers may have difficulty understanding, as well as intentionally varying price presentations across firms, to make it difficult to compare prices. While the present paper focuses on PP, we will discuss its relationship to these other methods that reduce price transparency.