All-inclusive pricing

B. Venkatesh

The cab drivers at the Bangalore airport charge an all-inclusive rate per kilometre for ferrying you to the city. That is, you are not charged additionally for using the air-conditioner (AC) in the car. This pricing system has affected their behaviour, for most of them seem reluctant to switch on the AC. Why?

Consider the normal practice, called partition pricing. You pay a variable rate per kilometre (km). If you use the AC, the variable rate is higher. Your conscious decision to pay a higher fare forces the cab driver to switch on the AC.

In an all-inclusive fare, the cab driver gets the variable rate, whether a customer uses the AC or not. The driver, hence, chooses not to switch on the AC, as that saves costs and increases his profits.

But is an all-inclusive pricing optimal? Studies in behavioural economics show that such pricing makes economic sense when the seller wants the customer to focus on the core offering.

Framing bias

Suppose you are shopping for a home AC. The seller can offer an all-inclusive price, which includes the stabiliser and the AC. Or he can offer a partition price, where each product is priced separately.

If the stabiliser is just a normal brand, the seller might as well offer an all-inclusive price. Why? Pricing the stabiliser separately catches our attention. We may choose not to buy it if we believe we can get better quality elsewhere.

If the seller instead makes an all-inclusive offer, we may focus our attention on the AC and just take the stabiliser that is given to us.

The difference in our behaviour, perhaps, has to do with the framing bias. Paying separately for the stabiliser means we need to take another decision besides buying the AC.

Our need to justify the pain of making another payment causes us to analyse the product. And reject it often. Taking a decision for an all-inclusive product is less difficult. Is that why the cab drivers adopt an all-inclusive price?

(The author is an investment psychologist. He can be reached at enhancek@gmail.com)

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