Digital Price Disclosure and Sustainable Service Operations: When Should Firms Offer Drip Pricing?

Digital platforms allow firms to attract consumers with a low displayed price and disclose additional fees later in the purchase process, i.e., drip pricing. This paper examines whether a service firm should introduce drip pricing alongside an existing integrated-pricing option. We develop a model incorporating deception aversion and switching costs to analyze pricing strategy choice, firm profit, and consumer surplus. Introducing drip pricing does not always increase profit. Contrary to the conventional consumer lock-in argument, higher switching costs reduce the profitability of mixed pricing because they discourage consumers from moving to the same firm’s integrated option. Stronger deception aversion also reduces profit. A higher add-on fee lowers the base price but may raise or lower the integrated price depending on deception aversion. Consumer surplus decreases with switching costs, whereas stronger deception aversion may increase consumer surplus when the resulting price reductions offset consumers’ perceived-deception losses. Comparisons between the two strategies identify conditions under which the firm and consumers both benefit, as well as conditions under which their interests conflict. Extensions examine consumer anticipation of add-on fees and competitive pressure from outside offers. The study identifies switching within the firm’s pricing menu as a key mechanism in drip-pricing decisions and provides implications for economic and social sustainability by examining when profit incentives are consistent with consumer benefits.