What is price coherence and why it is surprisingly bad for consumers

Interesting research and surprising results surely.

Price coherence is when both the company (say Jet Airlines) and intermediary (say Yatra.com) sell the flight ticket at the same price. So what is the problem? Well, consumers prefer to book such stuff from the intermediary as it offers many other things (like planning a holiday and so on). This leads the companies to offer more freebies to intermediary. And who pays for these intermediaries? Consumers who else.

Consumers often have the following choice: Either buy something directly from a retailer, or buy it indirectly through an intermediary, which partners with the retailer to attract more buyers. Think purchasing a plane ticket straight from the airline versus on Expedia.com, ordering takeout from a restaurant versus on Grubhub.com, or paying cash versus using a credit card.

In many cases, consumers pay the same price for a given product or service, whether buying it directly from its source or through an intermediary. Economists call this “price coherence.” It’s usually borne of contractual restrictions imposed by the intermediaries, who want consumers to focus less on price differences and more on the benefits of value-added services that they provide, such as distribution, one-stop shopping, easy scheduling, payment processing, and other conveniences.

If an intermediary like Expedia charges the same price as an airline, for example, then many consumers will choose to use the intermediary. After all, Expedia offers hotel upgrades, coupons, and even cashback rebates to frequent customers, not to mention the convenience of keeping customer information on file. While the intermediary charges a fee for its service, buyers widely perceive that the costs are borne by others, namely sellers. Sellers in turn pay the fee with the understanding that the intermediaries’ benefits attract desirable customers.

“On the face of it, price coherence seems good for consumers because they get a benefit for choosing the intermediary, and they pay no additional fee,” says Benjamin G. Edelman, an associate professor at Harvard Business School in the Negotiation, Organizations & Markets unit. “But actually, it’s not so good for consumers.”

Edelman explains the problem in the paper Price Coherence and Excessive Intermediation, co-authored with Julian Wright, an economics professor at the National University of Singapore. The paper discusses various markets in which an intermediary is optional for a transaction, including travel booking networks, restaurant ordering services, online rebate services, and some kinds of insurance.

Overall, the researchers find that price coherence actually leads to inflated retail prices, unnecessary usage of the intermediaries’ services, and an overall reduction in consumer welfare. The best things in life may be free, but price coherence isn’t one of them.

 

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