CFPB Reports on Consumer Behavior and Price Complexity

The CFPB reported findings from researchers that investigated the effects of price complexity on market outcomes. CFPB economists suggest the research has implications for understanding how junk fees impede fair and competitive pricing.

The central finding in the research paper, according to the CFPB, is that consumers tend to pay more for products that have more complex pricing structures. The CFPB said that this research has relevance to markets like auto loans or mortgages, where consumers have to evaluate extended warranties, add-ons, closing costs and a wide variety of other fees instead of an all-inclusive price.

In the paper, titled "Price Complexity in Laboratory Markets," researchers devised experiments with multiple rounds of buyers and sellers interacting in simple markets. Across various "treatments," the experiments varied how complex sellers were allowed to make their prices. In treatment 1, sellers could describe their price only using a single number. In treatment 2, sellers could describe their products using up to eight "sub-prices," (prices that added up to one total price.) In treatment 3, sellers could use up to 16 sub-prices.

The CFPB outlined key findings contained in the paper:

• Allowing more complex pricing led sellers to ask for higher total prices, on average. Comparing one price and 16 sub-price markets, average seller asks increased by more than 60 percent.
• Allowing more complex pricing led buyers to make more mistakes, on average. Comparing one price and 16 sub-price markets, the frequency of buyer mistakes increased by more than 16 percentage points, or almost 1,400 percent.
• Allowing more complex pricing led to higher transaction prices, on average. Comparing one price and 16 sub-price markets, average prices increased by more than 70 percent.
• In markets with multiple sub-prices, sellers can compete for sales by increasing their price complexity to cause buyers to make mistakes. Data shows that when one seller chooses a low price, the other seller, instead of choosing an even lower price, can profit most by choosing a higher price with high complexity. In contrast, in the one price treatment, sellers cannot increase complexity and therefore most of the standard equilibria hold.
• In a second experiment, increasing market competition generally improved, but did not eliminate, the negative effects of complexity. In markets with two sellers, average seller asks were about 64 percent higher in markets with more complexity. In markets with four sellers, average seller asks were only about 36 percent higher in more complex markets. In markets with two sellers, transaction prices were about 69 percent higher in markets with more complexity. In markets with four sellers, transaction prices were only about 38 percent higher in more complex markets. Buyers made more mistakes in markets with more sellers. In markets with two sellers, buyers made mistakes about 9.9 percent of the time. In markets with four sellers, buyers made mistakes about 20.1 percent of the time.