Sunk Cost Fallacy, Price Adjustment, and Subscription Services for Information Goods

Information goods often adopt a subscription-based business model, where customers pay a fixed fee to enter into a purchase agreement. The up-front payment of the subscription fee creates a sunk cost for members, which may influence their future consumption behavior. Although price adjustment is a common strategy employed by subscription providers, it remains unclear how changes in the fixed fee-as a sunk cost-affect the consumption of information goods. For this paper, we first leveraged a quasi-natural experiment in a movie subscription service and employed a difference-in-differences model to estimate the impact of fixed fee adjustments on overall consumption. Then we used a randomized experiment to unveil the underlying mechanism of sunk cost fallacy. Our findings reveal that the average treatment effect on information goods consumption is both significant and economically meaningful. Specifically, the box office revenues of an average movie increased by 12%similar to 35% in the six months following a sudden downward price adjustment, likely because a lower fixed subscription fee appeals to highly price-conscious consumers, who are more susceptible to the sunk cost fallacy. We also uncovered insightful heterogeneous effects, demonstrating that niche information goods, especially those driven by narrow appeal and high quality, benefit the most from such a downward price adjustment of a subscription service. Our results are robust to alternative control groups, placebo tests, and different data analysis granularity. Our research enhances the understanding of the sunk cost fallacy within the context of subscription-based information goods.