Punch line: Sometimes people do perceive that higher priced products are better – even when they’re not. They’re subconsciously using price as a “quality cue”.
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Excerpted from Free Market Madness by Peter Ubel
Standard economic theory holds that consumers independently evaluate the quality of a product and its price in order to make trade-offs between quality and price. According to this theory, people will be willing to pay more for product A than B if they perceive that A is better than B.
But consider the following experiment, in which
Researchers gave 125 people a beverage that claims to increase mental acuity, and then asked them to solve a series of word-jumble puzzles.
They informed people that the regular price of the beverage was $1.89.
However, they sold the drink at a discounted price of $0.89 to half the participants, selected randomly.
The researchers found that people in the discounted-price group not only reported lower expectations of the drink than those in the full-price group, but also performed significantly worse on the puzzle task, correctly solving 20% fewer puzzles.
Tags: Behavioral Economics, Price, Quality
The Homa Files 
December 2, 2011 at 9:44 am |
I heard that Ursinus College in PA wanted to improve the type of talent that applied and so was advised to raise tuition. Apparently it worked and applicants with higher SAT scores increased.
February 13, 2013 at 7:59 am |
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