IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v29y2010i1p175-190.html
   My bibliography  Save this article

The Price Precision Effect: Evidence from Laboratory and Market Data

Author

Listed:
  • Manoj Thomas

    () (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

  • Daniel H. Simon

    () (Applied Economics and Management, Cornell University, Ithaca, New York 14853)

  • Vrinda Kadiyali

    () (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

Abstract

We examine two questions: Does the roundness or precision of prices bias magnitude judgments? If so, do these biased judgments affect buyer behavior? Results from five studies suggest that buyers underestimate the magnitudes of precise prices. We term this the precision effect. The first three studies are laboratory experiments designed to test the existence of the precision effect and examine the underlying psychological processes. In Study 1, we find that precise prices are judged to be smaller than round prices of similar magnitudes. For example, participants in this experiment incorrectly judged $395,425 to be smaller than $395,000. In Study 2, we show that precision is more likely to affect magnitude judgments under conditions of uncertainty. Study 3 demonstrates that manipulating prior experience with the pattern of roundness and precision in numbers can moderate the precision effect. Studies 4 and 5 examine whether the precision effect influences buyers' willingness to pay for negotiated purchases (e.g., houses). In Study 4, we conduct an experiment on a nationally representative sample of homeowners to demonstrate that participants are willing to pay more for houses when the sellers use precise (e.g., $364,578) instead of comparable round (e.g., $365,000) prices. In Study 5, we analyze data from residential real estate transactions in two separate markets and find that buyers pay higher sale prices when list prices are more precise. These empirical results enrich our understanding of the psychological processes that underlie price magnitude judgments and have substantive implications for buyer and seller behavior.

Suggested Citation

  • Manoj Thomas & Daniel H. Simon & Vrinda Kadiyali, 2010. "The Price Precision Effect: Evidence from Laboratory and Market Data," Marketing Science, INFORMS, vol. 29(1), pages 175-190, 01-02.
  • Handle: RePEc:inm:ormksc:v:29:y:2010:i:1:p:175-190
    DOI: 10.1287/mksc.1090.0512
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.1090.0512
    Download Restriction: no

    References listed on IDEAS

    as
    1. Stiving, Mark & Winer, Russell S, 1997. "An Empirical Analysis of Price Endings with Scanner Data," Journal of Consumer Research, Oxford University Press, vol. 24(1), pages 57-67, June.
    2. Kaushik Basu, 2006. "Consumer Cognition and Pricing in the Nines in Oligopolistic Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 125-141, March.
    3. Luc Wathieu & Marco Bertini, 2007. "Price as a Stimulus to Think: The Case for Willful Overpricing," Marketing Science, INFORMS, vol. 26(1), pages 118-129, 01-02.
    4. Himanshu Mishra & Arul Mishra & Dhananjay Nayakankuppam, 2007. "Seeing Through the Heart's Eye: The Interference of System 1 in System 2," Marketing Science, INFORMS, vol. 26(5), pages 666-678, 09-10.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nicole Koschate-Fischer & Katharina Wüllner, 2017. "New developments in behavioral pricing research," Journal of Business Economics, Springer, vol. 87(6), pages 809-875, August.
    2. Cardella, Eric & Seiler, Michael J., 2016. "The effect of listing price strategy on real estate negotiations: An experimental study," Journal of Economic Psychology, Elsevier, vol. 52(C), pages 71-90.
    3. Pope, Devin G. & Pope, Jaren C. & Sydnor, Justin R., 2015. "Focal points and bargaining in housing markets," Games and Economic Behavior, Elsevier, vol. 93(C), pages 89-107.
    4. Matthew Backus & Tom Blake & Steven Tadelis, 2015. "Cheap Talk, Round Numbers, and the Economics of Negotiation," NBER Working Papers 21285, National Bureau of Economic Research, Inc.
    5. Converse, Benjamin A. & Dennis, Patrick J., 2018. "The role of “Prominent Numbers” in open numerical judgment: Strained decision makers choose from a limited set of accessible numbers," Organizational Behavior and Human Decision Processes, Elsevier, vol. 147(C), pages 94-107.
    6. Lee, Alice J. & Loschelder, David D. & Schweinsberg, Martin & Mason, Malia F. & Galinsky, Adam D., 2018. "Too precise to pursue: How precise first offers create barriers-to-entry in negotiations and markets," Organizational Behavior and Human Decision Processes, Elsevier, vol. 148(C), pages 87-100.
    7. Petri Hukkanen & Matti Keloharju, 2019. "Initial Offer Precision and M&A Outcomes," Financial Management, Financial Management Association International, vol. 48(1), pages 291-310, March.
    8. Zhu, Zhiwen & Behe, Bridget & Huddleston, Patricia & Sage, Lynnell, 2017. "How do pricing and the representation of price affect consumer evaluation of nursery products? A conjoint analysis," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 20(4), March.
    9. Garz, Marcel, 2018. "Effects of unemployment news on economic perceptions – Evidence from German Federal States," Regional Science and Urban Economics, Elsevier, vol. 68(C), pages 172-190.
    10. Danny Weathers & Scott Swain & Jay Carlson, 2012. "Why consumers respond differently to absolute versus percentage descriptions of quantities," Marketing Letters, Springer, vol. 23(4), pages 943-957, December.
    11. Wadhwa, Monica & Zhang, Kuangjie, 2019. "When numbers make you feel: Impact of round versus precise numbers on preventive health behaviors," Organizational Behavior and Human Decision Processes, Elsevier, vol. 150(C), pages 101-111.
    12. Eric Cardella & Michael J. Seiler, 2016. "The Effect of Listing Price Strategy on Real Estate Negotiations: An Experimental Study," Framed Field Experiments 00623, The Field Experiments Website.
    13. Asmus Leth Olsen, 2018. "Precise performance: Do citizens rely on numerical precision as a cue of confidence?," Journal of Behavioral Public Administration, Center for Experimental and Behavioral Public Administration, vol. 1(1).
    14. Layer, Patrick & Feurer, Sven & Jochem, Patrick, 2017. "Perceived price complexity of dynamic energy tariffs: An investigation of antecedents and consequences," Energy Policy, Elsevier, vol. 106(C), pages 244-254.
    15. Keith S. Coulter, 2013. "Commentary on: “an appraisal of behavioral price research (Part I)”," AMS Review, Springer;Academy of Marketing Science, vol. 3(3), pages 135-140, September.
    16. Keloharju, Matti & Hukkanen, Petri, 2014. "Initial Offer Precision and M&A Outcomes," Working Paper Series 1038, Research Institute of Industrial Economics.
    17. Santana, Shelle & Thomas, Manoj & Morwitz, Vicki G., 2020. "The Role of Numbers in the Customer Journey," Journal of Retailing, Elsevier, vol. 96(1), pages 138-154.
    18. Lynn, Michael & Flynn, Sean Masaki & Helion, Chelsea, 2013. "Do consumers prefer round prices? Evidence from pay-what-you-want decisions and self-pumped gasoline purchases," Journal of Economic Psychology, Elsevier, vol. 36(C), pages 96-102.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:29:y:2010:i:1:p:175-190. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew Walls). General contact details of provider: http://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.