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"Manufactured uncertainty"

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Monday, Mar 15, 2010

This post at Farnam Street, a behavioral economics blog, raises a point that always rankles me about purposely confusing pricing schemes designed to generate asymmetrical information. This is their take on nickel-and-dime fees the airlines have begun to charge:


Airlines are unbundling fares. ‘Airfares’ are lower but there are now fees for luggage, pillows, meals, coffee, and even washrooms (if the CEO of Ryan Air gets his way). What’s really happening though, is that airlines are making pricing less transparent to consumers.
The real purpose of separating costs (unbundling) is to make it harder for consumers to directly compare prices between airlines. It is now almost impossible to directly compare total prices for one airline to another without a lot of thought. Airlines are banking on consumers not doing this hard thinking and choose a flight based on something other than the lowest price.


Voilà: financial innovation. Sometimes this sort of strategy is a divide-and-conquer play, where the customers willing to do the work of figure out the real prices end up getting a better deal than their “lazier” comrades. But generally it is simple obfuscation to circumvent the norm of unambiguous posted prices.


This reminds me of an old HBR article from June 2007: “Companies and the Customers Who Hate Them” by Gail McGovern and Youngme Moon. “Companies have found that confused and ill-informed customers, who often end up making poor purchasing decisions, can be highly profitable indeed,” they begin, and then detail how management gets addicted to the baffle-the-customer approach. It begins when a price-discrimination schemes go rogue and begin to become deliberately vague, masking the ways in which fees are assessed. And it is abetted when there are natural or contrived hurdles for consumers to jump over before being able to switch to a new service provider. The brains in management realize that their customers have become fish in a barrel and then they open fire.


They single out banks, gyms and cell-phone companies for particular opprobrium: They cite how banks, for example, encourage practices that they can then charge penalty fees for—overdraft “protection” comes to mind, something Bank of America has surprisingly decided to partially suspend.


The article concludes with advice for how companies might regain the favor of the customers they have abused, but I had the feeling that it was more of a how-to article with an epilogue tacked on for ideological cover—the way authors would attach some moralizing to their pornography in the 18th century to get it past the censors.

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