March 22, 2008
The Undercover Economist: Eternal enigma
Friends of mine, husband and wife, once argued over the price of a branded packet of lemon slices bought at some convenient corner shop or petrol station. She complained that the slices weren’t worth the price she had paid. He pointed out that she had bought them – albeit grudgingly – knowing exactly how they tasted, and that therefore they had to be worth what she had paid. No prizes for guessing which of them is an economist.
We economists know a lot about pricing, but we tend to be baffled by the way the rest of humanity thinks about it. The package holiday offer, “Kids go free to Disneyland”, is, to an economist, a profitable attempt to charge more to couples with two incomes and no children, who are likely to have more cash to burn. To everyone else, it is an idea waved through unquestioningly.
The remainder of this column can be read here. Please post comments below.
If the price that has gone up is for a genuinely critical item, then even though the vendor “could” legally raise the price, there is immense social pressure not to - as seen during the UK fuel protests. It could be a part of human nature that says basic requirements should be rationed rather than auctioned. Maybe sub-optimal, but most people are not economists.
A related eternal enigma distinguishes us. Semiotics. We should know the previous price of an item is completely irrelevant to a current purchase decision - except as one of many signals to the true value of the item. Again the non-economist (the majority) would think that a price-reducing offer actually influences people’s purchase decision. But even professional marketing often seems to go with that (wrong) assumption.
Posted by: RNB | March 22nd, 2008 at 10:45 pm | Report this commentModern economists think they know a lot about prices, but does this ‘enigma’ not prove the opposite?
Consider the classical view that there is an objective measure of value that is connected to market prices. Consider also the notion that despite neo-classical theory, there is a widespread popular conception that price should reflect ‘value’. This can only be deemed ‘irrational’ if it is shown to be untrue, but what if classical economics is more right? In this case the popular conception of price is more rational, and modern economists irrationally cling to a theory that fails to explain the real world.
Posted by: Joe H | March 24th, 2008 at 10:05 am | Report this commentIncidentally, a related research from Cornell University finds that people have a bias towards round numbers, thinking that it must be a mark-up, and therefore a bad bargain. In other words, people think that selling a car for the round number of £3000 is more expensive than, say, £3129,50.
It’s the NPR podcast from 27 March 2008 (ie, today).
The researchers are Vrinda Kadyali and Manoj Thomas. Two publications related to this topic are:
Thomas, Manoj and Vicki G. Morwitz (2005). “Penny Wise and Pound Foolish: The Left Digit Effect in Price Cognition.” Journal of Consumer Research, 32 (June), p.54-64.
Thomas, Manoj and Geeta Menon (forthcoming). “When Internal Reference Prices and Price Expectations Diverge: The Role of Confidence.” Journal of Marketing Research.
Posted by: Chris H | March 28th, 2008 at 12:16 am | Report this comment