Monday, August 21, 2006

Psychological pricing and mental transaction costs

A common kind of mental transaction cost is demonstrated by psychological pricing, and in particular the strong tendency to price things at $(X-1).99 instead of $X.00.

As Brian Moore points out, an extra digit is an easy visual way to filter out higher prices:

If I see the following prices for gas:

.99
.98
1.02
.89

My brain immediately dismisses the 3rd price, then goes back and looks at the others to find the lowest A seller doesn't want to be eliminated like that.

Furthermore, we save on mental transaction costs by processing the more signicant digits first and often ignoring the rest. That fits our habit of scanning numbers from left to right.

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