Do consumers make too much effort to save on cheap items and too little to save on expensive items? experimental results and implications for business strategy
AbstractThe article presents an experiment that illustrates a behavior that I denote “relative thinking.” Subjects in the experiment revealed the minimal price difference for which they were willing to spend 20 minutes and go to a cheaper store. Five different goods and nine different prices were used in a between-subjects design. Subjects showed striking positive correlation between the good’s price and their valuation of their time as it was reflected in their decisions. The experiment suggests that subjects think about both the relative and the absolute price differences, even though according to economic theory they should only consider the absolute price difference. Quantifying the effect suggests that consumers’ valuation of their time is approximately proportional to the square root of the price of the good they want to purchase. Studying economics courses seems to mitigate relative thinking. Several alternative explanations for the observed behavior are suggested and discussed, but the conclusion is that only the relative thinking explanation can account for the experimental results. Finally, several implications of relative thinking for business strategy are discussed.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 20962.
Date of creation: 2009
Date of revision:
Relative thinking; Consumer behavior; Behavioral economics;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General
- D10 - Microeconomics - - Household Behavior - - - General
- M10 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - General
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-13 (All new papers)
- NEP-CBE-2010-03-13 (Cognitive & Behavioural Economics)
- NEP-CSE-2010-03-13 (Economics of Strategic Management)
- NEP-EXP-2010-03-13 (Experimental Economics)
- NEP-MKT-2010-03-13 (Marketing)
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