Context Adds Value 02

An experiment conducted in 1985 asked people to imagine they were sitting on a beach, feeling a bit thirsty and a friend offered to fetch one for them. They were then asked how much they would allow their friend to pay if he was buying it from a fancy hotel, and how much if he was buying it at a “small, run-down grocery store.”

 

Beer tastes the same, wherever it is bought from. So, logically, you would expect them to be willing to pay the same, whether from a fancy hotel or from a little shop. In fact, the participants said they would be willing to pay $2.65 for a beer from the hotel, but only $1.50 from the shop.

 

The participant’s willingness to pay 75% more depending on where it is bought is caused by people’s expectation that a big hotel will charge a premium for drinks, but people would feel ripped off if they paid the same price at a small shop.

 

The paper contains a number of other examples of counter-intuitive examples of pricing. One topic that seems to crop up from time to time is how prices are set for events and concerts, this paper gives some insights. It’s interesting but quite heavy reading.

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