Experimental Economics Seminar - Emilia Tjernström (University of Sydney, School of Economics)

Title: Nonlinear Pricing Complexity: Consumer Errors and Firm Profits

Abstract: In this paper, we use a lab experiment to examine the effects of pricing complexity on the welfare of boundedly rational consumers and on the price-setting firm's profits. From the firm's perspective, setting nonlinear prices to maximize profits requires the firm to know (or make assumptions) regarding the distribution of consumer demand. From the consumer's perspective, the complex prices increase the difficulty of finding the combination of goods and prices that maximize their surplus. The mistakes consumers make are not necessarily stochastic (evenly distributed around the correct decision) and are large enough that they have a negative impact on firm profits. Preliminary results suggest that consumer behavior departs enough from the common assumptions in the theoretical literature to change the preference ordering of nonlinear pricing schemes.