MIT professors Glenn Ellison and Sara Fisher Ellison have written extensively on the incentives, practices, and impacts of firms seeking to “make price search harder.” In particular, the professors examined the role of internet shopping in dramatically reducing search costs for comparative pricing, and the rational response of price obfuscation. Price obfuscation can help margins for firms, compared to an online shopping environment in which all prices are “all-in,” and the Ellison’s discuss how and why at length. In their most recent work, they also discuss some of the risks to society when firms apply obfuscation to pricing.
For airlines, all stakeholders have suffered the low margins, bankruptcies, and corporate failures that resulted from price wars and the tendency toward “commoditization.” For our industry, price obfuscation offers one way to help restore healthy margins, and it’s important for us to understand the economic mechanics. There’s no better place to start than with the Ellison’s work.
Selected Works:
“Search and Obfuscation in a Technologically Changing Retail Environment: Some Thoughts on Implications and Policy.” NBER Innovation Policy & the Economy (University of Chicago Press) 18 (1): 1–25.
“Search, Obfuscation, and Price Elasticities on the Internet.” Econometrica 77, no. 2 (March 2009): 427–52.
“A Model of Add-on Pricing,” Quarterly Journal of Economics, 120(2), 585-637, 2005
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