Saturday, August 2, 2008

On Sale for $89.40.... textbook, at Amazon, that is. Why not just charge $90? Despite economists' obsession with understanding prices, we have no explanation to offer. Indeed, in my textbook I state, "We can offer no good reason why so many goods sell for $0.99, 1.99, or $199."

That is, until now. A compelling article published in the April/May 2008 edition of Scientific American Mind discusses psychological research on this interesting phenomenon. Leave it to marketing researchers to answer the more interesting questions about price!

The two marketing professors, Chris Janiszewski and Dan Uy from the University of Florida, conducting a ground-breaking research project where they presented a high-def television to participants and asked them to guess how much the television costs at the wholesale level, given a certain retail price. Consider two retail prices: one of $5,000 and one of $4,988. Participants who saw the $5,000 price tag guessed the wholesale price was actually lower than those who saw the price tag of $4,988! If consumers believe a retail price is closer to the wholesale price, they believe they are getting a better deal and are more likely to purchase.

My textbook sells for $89.40 instead of $90, because shaving 60 cents off the price leads the consumer to believe the book costs more at the wholesale level, and to believe they are getting a better deal.