Abstract

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. In this paper, we first leverage a quasi-natural experiment in a movie subscription service and employ a difference-in-differences model to estimate the impact of fixed fee adjustments on overall consumption. Then a randomized experiment is utilized 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. Particularly, the box office revenues of an average movie increased by 12%~35% in the six months following a sudden downward price adjustment. This is because a lower fixed subscription fee appeals to highly price-conscious consumers who are more susceptible to the sunk cost fallacy. We also uncover 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 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.

DOI

10.17705/1jais.00914

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