I read that supermarkets are abandoning the 99p price point in favour of a “round pound” as this makes the products appear cheaper and reflects a more honest business practice.
I wonder if pricing psychology played any part in this decision – or is it just a cynical cash grab? After all, if they make an extra penny on every product they sell this year, it will mean tens of millions of pounds in extra profits.
S.C.

Dear S.C.,

This particular pricing decision involves three very different sets of costs and benefits, none of which the article you sent me sets out clearly.

The first is to do with the physical task of giving change. This is time-consuming for staff and shopper alike. However, because it requires that the transaction be registered, it also makes it harder for staff to divert money from the till into their own pockets.

The second is psychological. Do “round pound” prices or those ending in 99p seem cheaper? The article cites the same “expert” supporting both views.

The third is simple price-sensitivity. In classic economic theory, when the price goes up, revenues per item rise but sales fall. This is a straightforward trade-off and it is up to individual companies to find the sweet spot.

But your own theory is almost as confused. You seem to think supermarkets have offered customers a penny discount because they were run by kind people. This season the kind people are no longer in charge – and prices have risen.

I would dismiss your thesis out of hand if … I had a better one myself. Our discussion suggests several reasons for retailers using 99p endings, and several reasons for them using round numbers. It is not at all clear, though, what has changed. If you want my guess: some marketing bright spark tried “round pound” pricing and was surprised to find that it worked.

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My husband and I are following a tight budget, whereby he is using an Excel spreadsheet to plan our gas usage, spending of store card loyalty points, and so on. (I name just two of the 12 columns.) He has also plotted our petrol use on a graph. However, I became somewhat concerned when I lost a glove and its value was inputted into the “deficit” column – aptly titled column 13 – of the spreadsheet. I challenged this, as the glove was singular and therefore half the cost. It was also actually a gift – or two gifts. Are we down £15 (the approximate price of the pair of gloves), down £7.50, up £7.50, or quids in? This has become a sensitive issue in our marriage.
Mrs, soon to be Miss

Dear soon-to-be-Miss,

That the gloves were a gift is no longer important: the question is whether you are worse off for having lost them. And you are.

Nor are you worse off by a mere half-pair of gloves. Your gloves are, in the jargon, perfect or near-perfect complements. This means that the odd glove is worth little, unless you are holding down a career as a Michael Jackson impersonator. Just as important, the missing glove will be difficult to replace. Your husband is therefore quite right to claim that you have, in effect, lost the full pair of gloves.

But your husband’s competence ends there. His “deficit” column makes no sense in a spreadsheet designed to track expenditure. If you buy a replacement pair of gloves (or a single glove – good luck with that) then that is the moment to make a note in your spreadsheet, not before. You may not feel the need to replace them; it is August, after all.

Let’s be honest, though. This isn’t about the gloves, is it? It’s about your husband’s infuriating attempt to control you through a spreadsheet. Tell him either to put it away, or to add column 14: divorce expenses.

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I am assisting a friend who is contesting an Indian election as an independent candidate. We would like to raise campaign funds by getting common people to chip in. One of the problems I foresee is people arriving at a contribution website or collection booth and then not knowing how much to contribute. We could suggest predefined contribution amounts, but we wouldn’t like to see large contributions lost because our suggestions are too small. Neither do we want to turn away micro-contributions from large numbers of people. How should we proceed?
Regards, Gaurav Roy

Dear Gaurav,

Rachel Croson, an economist, and Jen Shang, a psychologist, have been asking themselves a similar question. Croson and Shang teamed up with fundraisers at two American public radio stations to stage a couple of experiments. In each experiment, when listeners called in to donate, the fundraiser casually mentioned a previous donation.

In the first experiment, the donation was either said to be $75, a typical donation, or $300. Callers who were told about the $300 donation tended to give more – more than 10 per cent more, on average. In the second experiment, the donation was said to be either $600 or $1,000. Here, the $1,000 hint raised less money than the $600, perhaps because the amounts were too large to seem relevant.

I have three suggestions. First, make your suggested contributions optimistic but realistic. Second, offer a spread of options to catch different types of donor. Third, experiment if you can – perhaps you can program your website to make different suggestions and see which combination works best. An election is not a radio station, and India is not the US, so this is an area where a little extra research may tell you a great deal.

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In the bunfight for Christmas leave, it’s never too early to start. I work in middle office, where there is an operational requirement to be staffed to a minimum of 50 per cent at all times. This year there are three working days between Christmas and New Year, and nobody wants to work them. What is the fairest way of divvying up the Christmas leave?
Middle Office Minion, London

Dear Minion,

It is an outrage that you and your colleagues have been placed in this absurd position. Let’s review the facts: you place a higher value on your time between Christmas and New Year, but your company’s annual leave policy does not place a higher price on these days. Given this pricing policy, everybody wants leave at Christmas, and so a bureaucratic bodge job is duly handed down from on high.

It is as though the company had offered each staff member a Christmas gift of either a bottle of champagne or a can of lager, and then started inventing rules on discovering that there was not enough champagne for everyone. The idiots who foisted this system on you should scrap it at once, and instead offer sufficient overtime pay at Christmas to ensure that there are enough recruits.

Failing that, the sensible solution is to arrange side-payments among yourselves. The people who value the break least (those with different faiths, or infuriating relatives) should be the ones doing Christmas duty, while the rest pay them compensation. Arrange a quick auction in which the amount of compensation rises over time; when enough bidders have dropped out of the auction, the remaining bidders pay the volunteers to hold the fort. Perhaps the compensation should be suitably seasonal: the bidding could open at one partridge in a pear tree.

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My new book, “Dear Undercover Economist“, is out this week in the UK, Australia, New Zealand, India and South Africa. The US and Canadian editions will be along in three weeks.

Dear Undercover Economist is a collection of my favourite “Dear Economist” columns from 2003-2008. Loyal FT readers will get the idea, but here’s a sample:

Dear Economist,

I work as an escort in Canary Wharf. I wonder if you might have some sound business advice on how workers in my industry should tackle the sudden drop in demand following the collapse of Lehman Brothers?
Miss C

Dear Miss C,

I wasn’t aware that escort services were pro-cyclical, but I shall take your word for it. You have three options, none of them perfect.

One: relocate. Canary Wharf is a pure banking play, and you could seek a more diversified market. The West End is full of hedge funds, oil barons and old money. However, I recognise that it will take some effort to find new clients. The economist Steve Levitt and sociologist Sudhir Venkatesh discovered, in a recent analysis of Chicago street prostitution, that the industry was very concentrated because prostitutes and clients would otherwise fail to find each other. You, of course, are not in quite the same game and may be able to relocate with ease.

Two: tough it out at Canary Wharf and hope that supply falls to match demand. Levitt and Venkatesh found that the supply of street prostitution was highly elastic in response to a demand surge. (The fourth of July holiday provokes a spike in trade for prostitutes – who knew?) Existing prostitutes would work longer hours, other prostitutes would travel to the area, and women who didn’t normally work as prostitutes at all would dabble in the business. This suggests that many of your rivals will find something else to do in the tough times.

Three: you may find that escort services are a little like estate agency, in that even severe demand shocks don’t tend to reduce fees. You’d find yourself well paid when in work, but frequently idle. That spare time could be used to study or find a part-time sideline.

I would give exactly the same advice to an estate agent.

Dear Dave,

In traditional economics there is no important motivational difference between stick and carrot, and so I can hardly accuse your wife of bad economics in that respect.

But, even if your proposal is accepted, you face a serious problem. Your vasectomy is a one-off operation, for which you seek an ongoing future incentive. How can you be sure that your wife will stick to the deal? Economists call this the “hold up problem”.

You are hoping for an extra 90 bouts of intimacy per year. Since I give your marriage five more years, tops, this adds up to an extra 450 sexual encounters in total. But there is no guarantee that, after you have your operation, you will experience any of them.

The obvious answer is a performance bond. Your wife could deposit, say, £45,000 with a lawyer. Whenever the two of you contact the lawyer to confirm that intercourse has occurred, he will release £100 to your wife.

Perhaps that seems unromantic, so I have a better idea – simply secure payment in kind upfront. If the two of you get busy, you should get through 450 lovemaking sessions within a year, perhaps sooner. You might even find you enjoy it so much that this troubled marriage perks up. I suggest you get started at once.

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My 15-year-old is disinclined to work for her GCSEs, saying her time is better spent preening herself in preparation for assignations with her delightful, diligent, privately educated, moneyed boyfriend. She insists the money spent on nail-painting, hair-colouring and the like is an investment and will be more than repaid when he marries her. Is she deluding herself?
A curious mother

Dear Curious Mother,

Surprising as this may seem in the 21st century, your daughter’s strategy is not unusual. Evidence on speed-dating gathered by the economists Michèle Belot and Marco Francesconi shows that women are attracted by rich men, while men focus more on a woman’s physical appearance. Lena Edlund, another economist, has found that in the areas of her native Sweden where the wealthiest men live, women of prime marriageable age are over-represented.

However, your daughter is only 15; for Edlund, “prime marriageable age” is 25-44. Your daughter is either going to have to get her hooks into this chap unusually early, or she is going to have to keep him on the boil for another decade – a lot of nail-painting.

Not only is she concentrating her investments into a single asset by abandoning her education, but she may even be making her main goal harder to achieve. Belot and Francesconi discovered that a strong social trend towards “assortative mating” means that although educated, high-achieving men are not interested in marrying a rich woman, they do like educated high-achieving women, rather than shallow girls with shiny nails.

Your daughter should learn to work hard and look good at the same time. Not only will it advance her immediate goals, it will also – sadly – stand her in good stead for the rest of her life.

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