Why do consumers ignore hidden costs?

In the current study, our goal is to test two hypotheses: 1) whether the pursuit of transaction utility could lead individuals to disregard hidden costs; and 2) whether present bias or numerical literacy affects an individual’s tendency to disregard hidden costs.

2022-07-21

2022-07-31

Intended analysis
Does deal utility exist in the context of transactions with hidden costs? (i.e. do people get more utility from transactions in which sales taxes are not shown compared to transactions in which sales taxes are shown?)
We will compare the subjective ‘deal’ rating responses by treatment group. These ratings were designed to be a direct subjective measure of transaction utility.
As a secondary analysis, we will compare the probability of choosing to buy the product between those randomly assigned to see prices with sales taxes (tax-inclusive treatment arm) and those randomly assigned to see prices without (tax-exclusive treatment arm). If seeing prices without sales tax increases transaction utility, we would expect this to result in an increased probability that the participant will choose to buy the product.
In both cases, we will make simple comparisons of proportions (or means) as well as testing the hypotheses using regressions that control for the amount of transaction utility (as defined in prior theoretical work as the difference between the expected price and the actual price), demographic characteristics, and other factors that have been shown to affect attention such as a change in the left-most digit once sales taxes are included.
Do measures of present bias or numeracy affect transaction utility when prices are shown with or without sales tax?
We will use regression analyses to test whether any difference between transaction utility (using the subjective ‘deal’ questions and also the decision to buy the products) in the tax-exclusive and tax-inclusive treatment arms varies systematically by numeracy and/or present bias.
Do people make choices to preserve transaction utility?
We will compare the subjective ratings and the probability of purchasing the products between respondents who saw prices as they indicated that they would prefer to see prices and those who saw prices the other way. That is, we will see whether seeing prices in the preferred way results in more transaction utility from a given purchase decision.
How do individuals prefer to see prices and taxes?
We will test whether participants’ preference for how to see prices (tax-inclusive, tax-exclusive, all-in) and their level of support for an all-in price policy varies by treatment arm, numeracy score, or presence of present bias (using the simple definition of choosing $100 now and $110 in eight days). We will run these analyses as simple comparisons of means and in regressions with controls as noted above.

In the current study, our goal is to test two hypotheses: 1) whether the pursuit of transaction utility could lead individuals to disregard hidden costs; and 2) whether present bias or numerical literacy affects an individual’s tendency to disregard hidden costs.

In our study (an online experiment run with a representative sample of the U.S.), participants are shown a series of consumer products. Participants are asked for their state of residence so that we are able to record the applicable state sales tax rate. First, we ask participants for the price they would expect to pay for these products in a store, to establish a “reference price.” Participants are then shown each of those products one at a time along with an auto-generated price. Participants are randomly assigned to see prices with or without sales tax explicitly shown. (For example, a participant in the tax-exclusive treatment arm would see prices as they are normally displayed in stores in the U.S., as $4.99, for example. A participant in the tax-inclusive treatment arm would see this price as $4.99 + $0.36 tax, $5.35 total.) Participants then indicate whether they would or would not buy at the price they see and are asked several subjective questions about how good of a ‘deal’ the price is. Participants are asked how they would prefer to see prices in the future (tax-inclusive or tax-exclusive). Participants are then asked if they would instead prefer to see all-in prices (i.e., just the total tax-inclusive price as is done for gasoline in the U.S. and in countries that have a VAT tax such as England) and their level of support for such a policy in the U.S. Participants are also given a short numeracy test (a five-question quiz that asks participants to calculate proportions and percentages in real-world situations such as leaving tips and lottery winning probabilities) and answer two questions to assess present bias (choose $100 today or $110 tomorrow and choose $110 in eight days or $100 in seven days).

randomization done by a computer

individual

No

n/a

500

250