Chapter 4, Section 3, Exercise 103

Price and Marketing

How influenced are consumers by price and marketing? If something costs more, do our expectations lead us to believe it is better? Because expectations play such a large role in reality, can a product that costs more (but is in reality identical) actually be more effective? Baba Shiv, a neuroeconomist at Stanford, conducted a study¹involving204

undergraduates. In the study, all students consumed a popular energy drink which claims on its packaging to increase mental acuity. The students were then asked to solve a series of puzzles. The students were charged either regular price ($1.89

) for the drink or a discount price ($0.89

). The student receiving the discount price were told that they were able to buy the drink at a discount since the drinks had been purchased in bulk. The authors of the study describe the result: "the number of puzzles solved was lower in the reduced-price condition(M=4.2)

than in the regular-price condition(M=5.8)...p<0.0001

".

¹Shiv B., Carmon Z., Ariely D., "Placebo Effects of Marketing Actions: Consumers May Get What They Pay For,"Journal of Marketing Research, 2005; 42: 383-393.

(a) What can you conclude from the study?

There is no evidence at all that the price of a product influences its effectiveness.

There is very strong evidence that price influences the effectiveness of a product.

There is only moderately strong evidence that price influences the effectiveness of a product.

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Write one or two sentences to answer the question.

(b) These results have been replicated in many similar studies. As Jonah Lehrer tells us: "According to Shiv, a kind of placebo effect is at work. Since we expect cheaper goods to be less effective, they generally are less effective, even if they are identical to more expensive products. This is why brand-name aspirin works better than generic aspirin and why Coke tastes better than cheaper colas, even if most consumers can't tell the difference in blind taste tests."²Discuss the implications of this research in marketing and pricing.

²Lehrer, J., "Grape Expectations: What Wine Can Tell us About the Nature of Reality,"The Boston Globe, February 28, 2008.