If you have ever wondered why your favorite milk tea used to cost ₱95 a few years ago but now sells for ₱120, you are not imagining things. Across the Philippines, many products and services follow the same pattern. Prices begin relatively low to attract customers and then slowly increase over time.
A study from the Kellogg School of Management offers a useful explanation for this behavior. In a research article titled “The Slow Drip of Price Increases,” economist Suraj Malladi examines how businesses set prices when they do not fully understand customer demand. His model suggests that starting with a relatively low price and then gradually raising it may actually be the safest and most profitable strategy when companies face uncertainty about how consumers will respond.
Malladi’s framework begins with a basic economic problem. Every product has what economists call a demand curve, which describes how many units consumers will buy at different price levels. But when a product is new, businesses rarely know what that demand curve looks like. They may have estimates, but the exact relationship between price and consumer demand remains uncertain.
Because of this uncertainty, firms must learn about demand over time. Malladi’s research assumes that companies cannot constantly experiment with prices. In many industries, prices change only occasionally, which makes each pricing decision important and potentially risky. Under these conditions, businesses tend to behave cautiously and focus on maximizing what Malladi calls “guaranteed profits”—profits that remain acceptable even if demand turns out to be weaker than expected.
The model produces a clear result. When a firm is uncertain about demand, the safest strategy is often to start with a relatively low price and then increase it gradually while observing how customers respond. If demand turns out to be stronger than expected, the firm receives valuable information that customers may be willing to pay more. It can then raise prices slowly and continue learning from the market.
Over time, this process allows the firm to move closer to the price that maximizes profit. Instead of guessing the perfect price at the beginning, the company discovers it step by step through small adjustments.
This gradual pricing pattern is easy to recognize in the Philippine market.
Consider the growth of local coffee chains in recent years. Brands such as Pickup Coffee entered the market with an aggressive pricing strategy, selling drinks at prices significantly lower than traditional café chains. The low prices helped the brand quickly attract customers and build demand. As the brand expanded and consumer acceptance grew, prices were gradually adjusted upward across different menu items.
A similar pattern can be seen in the fast-growing milk tea industry. When Macao Imperial Tea began expanding across the country, promotional pricing and attractive introductory offers helped bring customers through the door. Over time, as demand stabilized and the brand became more established, menu prices slowly increased across many locations.
Even ride-hailing platforms illustrate the same principle. Services such as Grab initially attracted users with competitive fares and discounts when ride-hailing was still new in the Philippines. As more consumers adopted the service and the market matured, pricing structures evolved and fares gradually increased.
Malladi’s framework helps explain why businesses adopt this approach. Starting with a low price reduces the risk of discouraging potential customers when a product is still unknown. Once demand proves stronger than expected, the company can cautiously increase prices without losing too many buyers.
In effect, the firm learns about the demand curve through experience. Each price adjustment reveals how sensitive customers are to price changes. If demand remains strong after a small increase, the firm gains confidence that the market can tolerate higher prices.
Malladi’s model suggests that companies often behave as if the demand curve contains a “kink,” meaning firms assume lowering prices will not increase demand dramatically but raising prices could cause demand to fall quickly. Because of this perceived risk, businesses tend to raise prices carefully and gradually rather than making large jumps.
For entrepreneurs in the Philippines, the research highlights an important lesson about pricing strategy. Many founders feel pressure to determine the “perfect price” before launching a product. Malladi’s findings suggest that pricing may be better treated as a process of learning rather than a one-time decision.
For consumers, however, the result often feels familiar. Prices rarely move downward once a product becomes popular. Instead, they rise slowly as companies learn more about what customers are willing to pay.
In that sense, the steady increase in the price of a cup of coffee or a milk tea may not simply reflect inflation. It may also reflect a quiet economic process—businesses discovering, step by step, where the market is willing to settle.
