Who Benefits From Transparent Pricing? | INSEAD Knowledge

Price opacity used to be the norm, but the arrival of the internet – with mass information sharing and price comparison sites – changed the consumer world for good. In the B2C world, consumers can find the cheapest deal with just web access and a bit of time. Although the B2B realm is somewhat more complicated due to the customised nature of the deals (see our article “Overcoming Price Suspicion in Negotiations”), there are plenty of examples of price disclosure in corporate transactions.

One such example was described by Thorsten Martin in his 2018 paper, “Real Effects of Price Transparency: Evidence from Steel Futures”. He analysed what happened when prices suddenly became transparent in the steel industry in 2008, after the introduction of steel futures on the New York Mercantile Exchange and the London Metal Exchange. Previously, steel consumers had to rely on delayed price indices. With the arrival of futures contracts, they could glimpse into real trading prices in a fraction of the waiting time.

Evidence from steel futures

As futures contracts are standardised and based on treated steel such as steel billets and hot-rolled coils, Martin was able to separate the effects of price disclosure on treated vs. control (other) steel. He examined several variables, including treated steel prices, producers’ surplus (a concept akin to profit margins) and their market share. Concerned that hedging, the economic recession, the standardisation of products and the resulting intensified competition could impact his analyses, Martin controlled for their possible effects.

The study revealed that the price transparency associated with steel futures reduced steel product prices by 9 percent and producer surplus by 5 to 9 percent. Furthermore, it increased the aggregate market share of low-cost producers by 20 percent and the aggregate producer productivity by 8 percent.

As demonstrated by this case study, price transparency can have plenty of benefits for customers and potentially for low-cost producers. Aside from cost reduction, price transparency allowed some customers to accelerate their businesses due to the more favourable business environment.

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Who Benefits From Transparent Pricing? | INSEAD Knowledge.