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Today In Stupid Consumer Tricks, Transaction Utility Edition…

November 11th, 2015 · No Comments
Behavioral Econ · Buyer Beware

So remember that time when JCPenney tried to stop BSing its customers with artificially high prices and constant sales? In case you forgot, it didn’t go so well. Now we have another attempt that appears to be about as successful:

http://economistsdoitwithmodels.tumblr.com/post/132958471370/jos-a-bank-tries-and-fails-to-wean-customers-off

See, it’s funny because if you ask consumers what they want, they for the most part say that they want to be treated with respect rather than be tricked by the latest marketing ploy. (or “phished,” as Akerlof and Shiller would likely put it) But then when companies give consumers what they say they want, consumers respond by taking away their dollars. The obvious answer is that consumers aren’t particularly self aware creatures (shocker, I know). But what exactly are consumers not self aware about?

The answer likely lies with the concept of transaction utility. The general idea is that transaction utility is the utility people get from feeling like they got a good deal, and, as a result, feeling like you got a good deal actually increases the perceived total utility you get from consuming an item. This, in turn, implies that feeling like you get a good deal makes it more likely that you will purchase an item, even though it doesn’t make you like the actual item more. Companies understand this (even though they likely don’t use the term “transaction utility”), so many of them manipulate the way in which they present information in order to keep your transaction utility high.

Economists generally think that transaction utility is a function of the difference between a “reference price” and the actual price charged for an item. This reference price could be what is put out as a regular price, what a consumer was expecting to pay for an item, etc.- the point is that one way companies can instill transaction utility is to figure out how to give consumers a high reference price. In this case, the company is putting what is, in my opinion, a ridiculous price on a single suit ($600-$800 for a pretty crappy suit, if I recall correctly from a while ago) and then offering a huge effective discount for those poor saps who apparently need to buy their suits in bulk. Consumers probably aren’t so stupid that they are totally unaware that something along these lines is happening, but that doesn’t necessarily mean they are immune from feeling the transaction utility and having it affect their choices.

Fortunately, there appears to be a limit as to how much companies can do to manipulate consumers’ reference prices- for example, it’s apparently illegal to call something a “regular price” of an item unless the item has in fact been sold at that price regularly. I guess what I’m really saying is to expect price tag terms such as “compare to,” “value,” etc. to become even more prevalent than they already are (just spend an hour at an outlet mall to see what I’m talking about). The upside for researchers is that we’ll get more data on whether these words have the same effect on transaction utility as a “regular price” does.

tl;dr: Dear consumers: Don’t hate the player, hate the game, especially since you all appear to be part of the problem.

Tags: Behavioral Econ · Buyer Beware

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