[Paleopsych] NYT: (Shrouding) Why That Doggie in the Window Costs a Lot More Than You Think

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Why That Doggie in the Window Costs a Lot More Than You Think
http://www.nytimes.com/2005/05/16/business/16behavior.html?pagewanted=print

    By DAVID LEONHARDT

    THE entry in the Zagat guide made the restaurant sound affordable. So
    did the menu posted near the door. Entrees were about $15. Even with
    wine, spending less than $80 for two people seemed like no problem.

    But once you are seated, the waiter comes by and asks if he may bring
    you some San Pellegrino sparkling water. Whenever your glass is
    half-empty, he fills it, and he always replaces a finished bottle with
    a new one, at $10 apiece. By the time dinner is over, the bill has
    crept toward $130, all because you did not want to seem too chintzy to
    order a little fizzy water.

    Welcome to the à la carte economy, where consumers seem to face new
    decisions every few minutes and businesses know precisely when their
    customers are most vulnerable. The practice of luring customers with a
    low list price is an old one - it's how television pitchmen get you to
    buy the Veg-O-Matic - but recently it has come to dominate many areas
    of the modern economy. The value of being a smart consumer, like the
    cost of being a naïve one, has risen sharply.

    A room at the Marriott may cost only $150, but the final bill looks a
    lot different once you have handed your car keys to the valet, used
    the high-speed Internet connection and eaten the $11 oatmeal. Late
    fees on credit cards have jumped. So have many mutual-fund fees.

    Two young economists, Xavier Gabaix and David I. Laibson, have come up
    with a name for this practice: shrouding. Once you start to think
    about it, you notice shrouding almost everywhere, like the features
    that add to the price of a new car, the warranty from [2]Best Buy, the
    burgers at the ballpark and the surcharge Ticketmaster puts on concert
    tickets. The price you hear is not the price you end up paying.

    At first blush, shrouding sounds like just a fancy word for rip-off.
    Whether they are selling marked-up Pellegrino or tacking on
    "convenience charges," businesses seem to be the ones benefiting from
    the hidden information. But that is not always the case, which is what
    makes the concept so interesting.

    There really are two types of consumers when it comes to shrouding:
    one who takes advantage of the murkiness and another who gets taken
    advantage of. To make matters even worse, the less savvy group ends up
    subsidizing the more sophisticated one.

    When the economy was simpler - when all phone service came from Ma
    Bell, for instance - there was far less room or need for shrouding.
    Today, with SBC, Cingular, [3]Cablevision and Vonage all trying to woo
    callers, their prices must grab people's attention. The profit can
    come after the customer is in the fold.

    "It's easier to customize now and create lots of different options,"
    Mr. Gabaix, a professor at the Massachusetts Institute of Technology,
    said.

    Credit cards are the most widely understood case. Few people can tell
    you the late-fee penalty on their credit cards, but those fees, which
    have risen sharply, make up a large portion of what many users end up
    paying. For people who pay their entire balance every month, though,
    credit cards are a bizarrely good deal. A free loan, a more convenient
    way to shop and perhaps some frequent-flier miles, too. Who's getting
    ripped off there?

    It is possible only because people who run up interest charges and
    late fees keep the banks in business.

    Mr. Laibson, a professor at Harvard, has his own favorite example of
    shrouding: [4]Hewlett-Packard's inkjet printers. The advertised price
    is as low as $35, but it includes no ink cartridges or paper, two
    necessary items for printing.

    "Here's my challenge to you," he said. "Go to the H-P Web site and
    pretend to be an individual purchaser of a computer, not a business.
    Go to the deskjet printers. See if you can find the cost of printing
    on a per-page basis. That is the most important information."

    All I could find - and it took many misdirected clicks to get there -
    was an estimate of the number of pages each cartridge would print. A
    little arithmetic led to a per-page cost of about 10 cents. Print 10
    pages a day, and you have already doubled the cost of that apparent
    bargain, the $35 printer, in little more than a month.

    John Solomon, a vice president of supplies marketing at
    Hewlett-Packard, said the company wanted the printing industry to
    adopt a standard for calculating per-page cost. Without one, other
    companies could exaggerate the size of a cartridge's print load,
    making Hewlett-Packard's per-page cost look unfairly high, he said.

    "We feel it is important, but we have hidden it. We have put it in a
    place that only people who really care will find it," Mr. Solomon
    said. "Because it's not really good information if there's not a level
    playing field."

    If shrouding were really just a form of gouging, you would also expect
    new companies to enter the market and sell items for a lower, but
    still profitable, price. And sometimes that does happen.

    [5]Netflix has helped cause Blockbuster's current corporate traumas by
    attracting people who do not want to worry about late fees, an often
    overlooked part of the price. "Blockbuster has made a lot of money off
    of people's busy lifestyles," said Leslie J. Kilgore, Netflix's chief
    marketing officer.

    More often, though, there is little chance for a competitor to make
    money while eliminating shrouding. Even in the printer market, some
    people understand the game. They print their large jobs at the office
    or switch to a lower-quality printer setting to use less ink on each
    page.

    These are the smart, unprofitable customers. They are also the ones
    who would be attracted to a competitor that was being more upfront
    about prices than Hewlett-Packard. That does not make for a good
    business plan.

    So companies have little choice but to play hide-and-seek with their
    prices. When enough customers catch on, businesses shroud in a new
    way.

    As people have reduced their outstanding credit card balances, banks
    have increased the penalties for making a single late payment. As
    liquor sales have dropped, restaurants have found a new beverage to
    mark up: may we pour you some more Pellegrino?