Nonlinear Pricing Complexity: Consumer Errors and Firm Profits

Abstract

We study consumer behavior under different nonlinear pricing schemes. We design a laboratory experiment that presents consumers with varying levels of complexity in pricing structures—component pricing (CP), mixed bundling (MB), bundle-sized pricing (BSP), and pure bundling (PB). While prior research has examined the computational challenges that firms face when setting optimal prices, we instead focus on the cognitive costs consumers incur when choosing among complex price menus. This highlights how governance mechanisms—in this case, firm pricing structures—affect consumer decision-making. Nonlinear pricing serves as an implicit contract that governs the interaction between firms and consumers, influencing both market efficiency and surplus distribution. By experimentally testing how consumers respond to different pricing regimes, we generate falsifiable insights into the trade-offs firms face when designing pricing structures. Our findings also have implications for policy and regulation, as they underscore the potential consumer welfare losses from overly complex pricing. Our experimental results show that as the number of goods increases, consumers capture less of the achievable surplus under CP and MB but remain relatively unaffected under PB and BSP. This finding suggests that pricing complexity imposes real costs on consumers, which may, in turn, shape firm pricing strategies.