Document Type

Article

Publication Date

2-1-2007

Abstract

Research on behavioral pricing has found that presenting the price of a product or service in separate parts rather than a consolidated whole can reduce consumers' perceptions of the total cost. That principle suggests that restaurants which charge separate fees for their food and service whether by voluntary tipping or an automatic service charge may be perceived as less expensive than those that include service charges in the form of an all-inclusive price. An internet-based simulation testing that idea found that participants rated restaurants with tipping or automatic gratuity policies as less expensive than restaurants that built the costs of service into menu prices. Furthermore, participants ordered more expensive meals when automatic gratuities were added to the bill than when the costs of service were built into menu prices. While the study was a simulation only (and no money was at stake), the industry's longstanding practice of setting menu prices with service charges extra is supported by these findings.

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© Cornell University. This report may not be reproduced or distributed without the express permission of the publisher

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