Tuesday, July 21, 2009

The End of .99 Pricing

Economists have long been interested in the phenomenon of 99-cent pricing: prices that are given so that they end in .99, rather than at the next whole dollar amount. For example, in many contexts it is much more likely that you will see an item selling for $3.99 rather than an even $4.00.

Economists are curious about this real-world phenomenon since the idea that the psychology of a price starting with "3" instead of "4" makes a difference flies in the face of the fairly standard rationality assumptions made on the part of consumers. That is, consumers aren't stupid, so they should recognize immediately that the difference between $3.99 and $4.00 is precisely one cent--the same as the difference between $4.00 and $4.01.

There is a fairly rich, expanding literature on 99-cent pricing. For example, in a 1997 paper appearing in Economics Letters, Kaushik Basu explains the phenomenon without abandoning the assumption of rationality on the part of consumers.

Well, an article in the new issue of the BBC Magazine notes that the UK's top four grocers have been rapidly abandoning prices that end in .99, opting instead to round up to the nearest pound. Its author, Laura Schocker, puts forth three possible explanations.

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