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Pricing, as it relates to value, is the subject of a fascinating book by William Poundstone, “Priceless: The myth of fair value (and how to take advantage of it), Hill and Wang, New York, 2010. The book was recommended to me by Wayne Jordan, who writes for Antique Trader magazine. Wayne was aware of my frustration at trying to understand why antiques dealers put one price on their merchandise, only to offer a lesser price to anyone who asks ‘can you do better? While I was more interested in knowing why and how this practice started, the book at least helped me to understand why it has continued unchallenged. And it’s all about psychology, not economics.

The main point of the book is that people, in general, have no idea of ‘value’, and react to many different conscious and unconscious stimuli in deciding whether the absolute, or list price of an item is reasonable or not. (In the antiques world, this may apply to a lesser degree to experienced collectors, who specialize in one type of item and have developed a sense of value/price in what they collect.) This failing was discovered – to the dismay of economists who want to believe that people are always perfectly reasonable and perfectly well-informed – through a series of experiments, one of which really hit home: two different groups of people were shown the same item, but the item was priced differently for each group. Each group was asked to make an offer for the item based on what they thought it was worth. The group shown the higher priced version made offers significantly higher than the group shown the same object at a lower price. The same item at different prices resulted in different estimates of value and different offers. Reminded me of the time a customer offered me a ridiculous price on a bronze bust of Benjamin Franklin. I was so upset that I doubled the price of the bust and sold it the next week, after a discount, for more than my original asking price.

While people aren’t good at determining ‘value’, list price does serve a purpose as an ‘anchor’ against which other prices are compared. “List price $1000, on sale now for $500” seems like a great deal, but did the list price or ‘anchor’ represent a reasonable value of the item? Customers do resonate to contrasts – and the item at $500 seems a great deal by contrast. It turns out that having a few items with a very high price will help sell more of your moderately priced items. This directly contradicts what I have always been told – if you have one or two high priced objects in your booth at a show, it makes everything else ‘suspect’. Wish I could remember who imparted that bit of wisdom.
People also resonate to ratios in surprising ways. In another experiment, participants were told that they could purchase a jacket for $125 and a calculator for $15. They were also told that the calculator was on sale for $10 at another store, 20 minutes away. When asked if they would make the trip, most said yes, to save the $5. Another group heard a different version of the question where the jacket was only $15 and the calculator was $125. When asked if they would drive the 20 minutes to save $5, most said no. In both versions, the buyer would spend $140 total and the drive would save $5. But the $5 seems a significant savings on a $15 calculator, (the ratio 5::15), but not worth the drive on a $125 calculator (the ratio 5::125). Go figure.

The book is full of interesting stories, well defined experiments, and useful insights into the behaviors that people exhibit when it comes to price. Of particular interest is the finding that when customers are uncertain, they will shy away from the most expensive and the least expensive item, the highest quality or the lowest, the biggest or the smallest. Most will favor something in the middle.
Since our economy is essentially consumer-based, the study of price-related behaviour in humans has taken on increased significance. It has in fact evolved into a science called psychophysics.

The book is well worth the read. In fact I plan to re-read it when I finish my current book on ‘kicking the antiques dependency’. While I learned a lot, including ‘if you don’t ask for it, you won’t get it’, I didn’t find an obvious answer to the question of when and why ‘discounting’ started. Or did I?

Did some ancient retail savant understand – pre-psychophysics – that people don’t have a clue as to value and would accept any asking price as a starting point for negotiations? And then it was simply a matter of who was the better negotiator?? And am I still wrong in thinking that this is an awful way to do business? I have heard from several dealers who just love the process of haggling and wouldn’t have it any other way. But as a cautionary note, our slightly better regarded brethren car dealers are moving to a ‘firm pricing’ model! What’s up with that?

My sense has always been that by not having - what one of my customers always called – the ‘real’ price on the tag, you set up an adversarial relationship, one of mistrust (this isn’t the real price), anxiety (I hate having to ask for a discount), and buyer’s remorse (if he accepted my offer I probably could have gotten an even better price). I think it smacks of dishonesty. But as Mr. Poundstone states, fair value is a myth and there are ways to take advantage of people’s weaknesses. And all this time I thought we were better than that.