Search Costs, Hassle Costs, and Drip Pricing: Equilibria with Rational Consumers and Firms

This paper examines drip pricing related to compulsory charges—a situation where firms intentionally make it costly for consumers to discover mandatory fees or surcharges that “drip” into the full (total) price, which is only revealed after incurring the hassle cost of completing a purchase. We show that drip pricing can arise as an equilibrium phenomenon with fully rational consumers and profit-maximizing firms. We also show that when consumers and firms are rational (a) situations where drip pricing raises prices and harms consumers are unlikely to arise from unilateral business decisions and (b) the most likely avenue by which drip pricing harms consumers is through the coordinated adoption of drip pricing.