The Launch Premium: Cohort Comparison and the Pricing of Perishable Goods
This paper demonstrates that when consumers use a firm's initial price as a fairness benchmark for later purchases, the seller optimally sets a higher launch price to relax future behavioral constraints, resulting in a "launch premium" that increases with comparison intensity while simultaneously compressing price differences across cohorts.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the author. For technical accuracy, refer to the original paper. Read full disclaimer
In the world of selling things that disappear if they aren't sold by a certain time—like a seat on a plane, a room in a hotel for tonight, or a ticket to a concert—businesses face a constant puzzle. They must decide how much to charge as the date approaches and the number of available spots shrinks. Standard economic theory suggests that prices should rise and fall based purely on supply and demand: if many people want a ticket and few are left, the price goes up; if the event is far away and seats are plentiful, the price stays low. However, this view assumes that customers are purely rational calculators who only care about the price they see in front of them. In reality, people are social creatures who constantly compare their treatment to that of others. If a person buys a ticket for a concert and then discovers a friend bought the same ticket for less money just a week later, the first buyer often feels a sharp sense of unfairness. This feeling can hurt the seller's reputation and reduce future sales, creating a hidden cost to changing prices too drastically.
A new study from the London School of Economics and Political Science explores how smart businesses should handle this human tendency to compare. The researchers built a model to see what happens when a company knows that its early customers will set a standard for how later customers judge fairness. They found that the best strategy is not to lower prices to avoid complaints, but surprisingly, to start with a higher price than usual. By charging more at the very beginning, the company creates a high benchmark. Later, when demand shifts and the company needs to lower prices to fill seats, the drop feels less severe because it is measured against that high starting point. This approach allows the company to keep prices stable for different groups of people, avoiding the anger that comes from seeing others pay significantly less for the same thing.
The study, led by Chris Doyle, focuses on a specific phenomenon called the "launch premium." In simple terms, this is the extra amount a company adds to the very first price it sets for a product. The research shows that this premium is not a mistake or a sign of greed, but a calculated move to protect future profits. When a company sets a high initial price, it establishes a reference point for everyone who comes after. If the company later has to drop the price because demand is weak, the later buyers are comparing their new, lower price to the high price paid by the first group. Because the first group paid more, the later group feels they are getting a better deal, or at least a fair one, rather than feeling they were treated unfairly. This psychological cushion allows the company to adjust prices more freely later on without triggering the anger that usually comes with price cuts.
The researchers discovered that this strategy works best when the company knows its customers will be watching each other. In markets where people can easily see what others paid—such as online ticket sales or ride-sharing apps—the pressure to be fair is strong. The model predicts that in these situations, the initial price should be raised by about five to ten percent above what a standard business model would suggest. At the same time, the difference between the highest and lowest prices charged to different groups of customers shrinks dramatically, falling by eighty to ninety-five percent. This means that while the starting price goes up, the range of prices the company charges later becomes very narrow. The company sacrifices a little bit of immediate profit on the first batch of sales to secure a much more stable and profitable environment for the rest of the selling period.
One of the most striking findings is that this strategy does not disappear even when companies use advanced computer algorithms to change prices constantly. Many businesses hope that by updating prices every few minutes, they can react perfectly to the market and avoid these kinds of behavioral problems. However, the study shows the opposite is true. The more frequently a company changes its prices, the more groups of customers there are to compare themselves to one another. This actually makes the need for a high starting price even stronger. The computer algorithms, instead of eliminating the distortion, magnify it. The more often the price is updated, the more valuable it becomes to set that initial high benchmark, because it will serve as the reference point for a larger number of future transactions.
The study also looked at how the scarcity of the product affects this strategy. It turns out that the launch premium is most effective when the product is somewhat scarce but not completely sold out. If there are plenty of seats available, the company doesn't need to worry as much about fairness because prices are naturally low. If the product is guaranteed to sell out, the company can charge high prices anyway because people have no other choice. But in the middle ground, where there is a risk of unsold seats but also a risk of running out, the fear of unfairness is most potent. In these scenarios, the company gains the most by raising the initial price to smooth out the differences for everyone else.
This research challenges the idea that fairness is just a nuisance that forces companies to keep prices low. Instead, it suggests that fairness is a tool that can be managed strategically. By understanding that customers judge their prices based on what others paid, companies can use a higher starting price to their advantage. The study confirms that this "launch premium" is a real and measurable force in the economy, driven by the human desire to be treated fairly compared to peers. It explains why some industries, like airlines, have managed to keep their pricing systems relatively stable and accepted, while others, like event ticketing, often face public backlash. The difference lies in how well the companies have set their initial benchmarks and how they have managed the comparisons between different groups of buyers.
Ultimately, the paper provides a clear picture of how modern pricing works in a world where information is shared instantly. It shows that the old rules of supply and demand are now mixed with the rules of human psychology. A company that ignores the way its customers compare themselves to one another will find its pricing power limited by the anger of those who feel treated unfairly. But a company that understands this dynamic can turn that potential anger into a stable, profitable strategy, starting with a price that is higher than expected to ensure that the journey for every customer feels fair.
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