NPR’s Planet Money points to two excellent studies:
Past research has found that changes in price endings can result in “left-digit effects” whereby the magnitude of an item’s price relative to the price of a reference product is influenced by the leftmost digits of both prices. We extend this work by investigating the impact of changes in price endings and associated leftmost price digits on choice. Findings indicate that assigning different combinations of price endings to two products (e.g., $2.00 and $2.99 vs. $1.99 and $3.00 vs. $2.00 and $3.00) can shift choice share toward the lower- or higher-priced alternative. We also find that changes between just-below (e.g., $29.99 and $39.99) and round (e.g., $30.00 and $40.00) pricing affect choice, with just-below pricing shifting share toward lower-priced alternatives. The latter effects are found to be moderated by price level and shopping goals. A three-path mediation model reveals the processes underlying the influence of price endings on choice.
Source: “Price Endings, Left-Digit Effects, and Choice” from Journal of Consumer Research
Can heuristic information processing affect important product markets? We explore whether the tendency to focus on the left-most digit of a number affects how used car buyers incorporate odometer values in their purchase decisions. Analyzing over 22 million wholesale used-car transactions, we find substantial evidence of this left-digit bias; there are large and discontinuous drops in sale prices at 10,000-mile thresholds in odometer mileage, along with smaller drops at 1,000-mile thresholds. We obtain estimates for the inattention parameter in a simple model of this left-digit bias. We also investigate whether this heuristic behavior is primarily attributable to the final used-car customers or the used-car salesmen who buy cars in the wholesale market. The evidence is most consistent with partial inattention by final customers. We discuss the significance of these results for the literature on inattention and point to other market settings where this type of heuristic thinking may be important. Our results suggest that information-processing heuristics may be important even in markets with large stakes and where information is easy to observe.
Source: “Heuristic Thinking and Limited Attention in the Car Market” from NBER Working Paper No. 17030, Issued in May 2011
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