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I’m not sure whether this question is appropriate here, as I’m not a professional economist and this might be considered too basic a question. It might even be more of a psychology question, I’m not sure. But I was wondering what economics says about what I would call the “starting from” pricing pattern in advertising. My first question would be whether there’s a more properly defined term for it.

It’s a common enough pattern: for example, an advertisement on a website that promises “Spend a weekend in Paris!” highlighting a price of “€150”, preceded by, in small type, the words “starting from”. When you click through, this price turns out to only apply to the weekend of Saturday December 25th, which most people would prefer to spend with their family and when many sights in the city are closed. Not to mention that it’s in winter time. Every other weekend the website offers and which is closer to what you had in mind when viewing the advertisement (Paris in summer!) is really priced at €300. (I just made up those numbers).

More generally stated, the pattern consists of advertising a highly desirable price for a seemingly desirable product, which really only applies to an undesirable version of the product, while offering a more desirable product at a less desirable price.

On one hand, I assume this pattern is effective in enticing people to check out the advertiser’s offerings. On the other hand, there’s an ineffectiveness in making people feel disappointed or outright deceived by the advertisement, possibly making them turn away.

I was wondering what economics says about this pattern. Some more specific subquestions:

  • Is there a more properly defined term for it?
  • Is there some more formal or experimental study on the relation between the “starting from” price point and the more realistic one and the effectiveness of such advertisements?
  • Is there some comparison on this advertising pattern and others, such as one in which both price points are stated? (like “Spend a weekend in Paris! Summer weekends at €300 or in winter as low as €150”)
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2 Answers 2

up vote 3 down vote accepted

Glenn Ellison's "A model of Add-On Pricing" seems closely related to this issue.

He addressed the question 'why don't firms compete more aggressively to attract consumers by lowering the initial price?' The answer that he offers is that doing so induces an adverse selection problem because lowering the advertised price will disproportionately attract "cheapskates" who will not pay the add-on price for a more expensive version of the goods.

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The effect is called Anchoring. As you also say, it is actually a psychological term, made popular/coined by Kahneman.

http://en.wikipedia.org/wiki/Anchoring

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