Lifting the Veil: The Benefits of Cost Transparency

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Lifting the Veil: The Benefits of Cost Transparency

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Title: Lifting the Veil: The Benefits of Cost Transparency
Author: Mohan, Bhavya; Buell, Ryan Williams; John, Leslie Kathryn

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Citation: Mohan, Bhavya, Ryan W. Buell, and Leslie K. John. "Lifting the Veil: The Benefits of Cost Transparency." Harvard Business School Working Paper, No. 15-017, September 2014. (Revised May 2015.)
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Abstract: A firm’s costs are typically tightly-guarded secrets. However, across a field study and six laboratory experiments we identify when and why firms benefit from revealing unit cost information to consumers. A natural field experiment conducted with an online retailer suggests that cost transparency boosts sales. Six subsequent controlled lab experiments replicate this basic effect (Studies 2-6) and provide evidence for why it occurs: just as interpersonal disclosure of intimate information increases attraction, cost transparency by a firm increases brand attraction, in turn boosting consumer purchase interest. This relationship persists even after controlling for perceptions of price fairness and product quality (Study 3). Study 4 suggests that the beneficial effect of cost transparency holds when firms spend more on “less desirable” costs relative to “more desirable” costs. Studies 5-6 show that the effect of cost transparency weakens when high profit margins are made salient. Finally, Study 7 shows that the beneficial effect reverses (i.e. cost transparency backfires) when it is revealed that a firm’s profit margins are high relative to those of its competitors.
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