“10 for $10”

Price labels like this have become a sign of the Great Recession. You're invited to buy ten of something for $10. Small print says "$1.00 each." Huh? That's right, there's no discount for buying ten items. So what's the point?
Rest assured that supermarkets must have reason to believe that these labels boost sales. The question is, how? I'm not aware of any academic papers directly addressing 10/$10 pricing. Two ideas come to mind.
One is that it's a twist on the old "economy size" tactic. Many shoppers instinctively reach for the bigger package — or shop at the big box store — in the belief that they're getting a better deal. Sometimes they are, and sometimes they aren't. In this case, shoppers might lob ten cans into their cart and never read the fine print.
I doubt too many people do that, though. It seems that 10-for-$10 pricing is mostly applied when you wouldn't normally buy ten of an item. I don't think I've ever bought ten cans of anything, save soft drinks. My impulse would be to scrutinize the label to see whether you can buy less than ten at the special price — which you can.
An alternate explanation for 10/$10 prices is anchoring, the cognitive phenomenon described by Amos Tversky and Daniel Kahneman in the 1970s. Anchoring occurs when we guesstimate numerical quantities. Shoppers do that a lot. The shopper must decide, how much should I pay? and how many should I buy? Strict logic cannot answer such questions. The answer is necessarily intuitive (and often, must be made while wrestling kids or yakking on the cellphone). It's been shown that when people have to come up with a numerical estimate on intuitive grounds, they are easily swayed by any numbers provided as cues (or "anchors.") With 10/$10 pricing, the suggested ten items becomes an anchor. It sends the subtle message, of course you need ten cans of salsa this week! On the face of it, that sounds ridiculous. But anchoring exerts an effect even when we know the cue is absurd.
One of the most amusing anchoring experiments, by Karen Jacowitz and Daniel Kahneman, asked a group of subjects this two-part question:

(a) Does the average American eat more or less than 50 pounds of meat a year?
(b) How much meat does the average American eat in a year?

The group's median answer was 100 pounds of meat. The researchers asked a separate group a similar question, except that this time, part (a) asked whether the average American ate more or less than 1000 pounds of meat. For this group, the median estimate was 500 pounds. Just hearing a different cue — 1000 rather than 50 pounds — boosted the group's estimate five-fold. Furthermore, anyone who thought about it could have calculated that 1000 pounds was a ridiculous answer. It would be the equivalent of ten McDonald's Quarter-Pounders a day! The ridiculous anchor value still had a huge statistical effect on answers.
In the experiment, the subjects were simply guessing the answer to a trivia question. Shoppers guess too in estimating how many cans of salsa their family will eat. It's possible that 10-for-$10 pricing has an effect similar to the cues in Jacowitz and Kahneman's experiment. It makes shoppers buy more items than they would have.

SEE ALSO
Jacowitz, Karen E., and Daniel Kahneman (1995). “Measuring of anchoring in estimation tasks.” Personality and Social Psychology Bulletin 21, 1161-1166.

Living Next to the Obamas: Worth $500,000?

The home next to Barack Obama's in Hyde Park, Chicago, has just gone on the market. Reports The New York Times,

The price? Hard to know, real estate agents say, because not since Richard M. Nixon lived in a New York City apartment has the market tried to assess the value of immediate proximity to the president in a dense urban neighborhood. (The Greenwood Avenue neighbors are separated by about 20 feet, a line of thin trees and an iron fence that is more decorative than forbidding.) The Grimshaws paid $35,000 in 1973; other homes in the area have sold for $1 million to $2.5 million.
“We think there’s a premium,” said Matt Garrison, the listing agent with Coldwell Banker, who does not intend to put an asking price on the house. “We don’t know what the Obama effect is.”
Mr. Garrison said he had tried to scout similar parcels of residential property, but pointed out that there was no family living next door to the White House.
“I tried to look at 12 Downing Street, but that’s all offices,” Mr. Garrison said, referring to the building next door to the British prime minister’s residence in London.

Needless to say, the Obamas aren't spending much time in Chicago these days. Thus the value of living next-door to "Barry" and Michelle amounts to a rather vague bragging right. This can't be called an "entertainer's house" as the Secret Service bars the street to non-residents. (Yes, that's even with the Obamas in Washington.) Sellers Bill and Jackie Grimshaw were urban pioneers who bought a down-at-heel mansion in a gritty neighborhood. Now the area has gentrified, and like most people in that position, the Grimshaws live a bit more modestly than the pool of likely buyers. (“I didn’t lavish attention on the house,” Professor Grimshaw admits. Mocking an outraged, imaginary potential buyer, he said: “Where’s the granite? How can people live like this?”) By current Hyde Park standards, it's a fixer-upper.
Evidently the listing agent chose not to have an asking price out of fear it would be too low (cheating the seller) or too high (scaring off buyers). There is considerable evidence that it would be wiser to set a high price and be willing to come down. The list price is an "anchor" that exerts a powerful influence on estimations of value. In a 1987 paper, Gregory Northcraft and Margaret Neale, then at the University of Arizona, studied the effect of listing prices on perceptions of real estate values in Tucson. The effect was huge: even practicing real estate agents could be swayed 14 percent in their estimations of fair market value. For regular folks, the effect was twice that. That's an advantage no home seller should ever willingly cede.


Zillow estimates the value of the Grimshaw house (5040 S. Greenwood Avenue, centered in the aerial view above) at $1,837,000. It also appears to confirm a substantial Obama premium. This Zillow chart traces the house's estimated value over the last year, compared to average values for the 60615 zip code and Chicago. Not surprisingly, Chicago values are down 10 percent over the past year. But Hyde Park's zip code is flat, and the Grimshaw house is up a hefty 38 percent.


Zillow's pricing formula doesn't factor in an Obama premium, not directly. And the estimates for the Grimshaw house actually dipped after the election. That may reflect the time lag for nearby houses to go on the market and close escrow at prices reflecting the Obama premium. If accurate, the Zillow figures imply the Grimshaws are up about half a million, thanks to the neighbors.

SEE ALSO
Northcraft, Gregory B., and Margaret A. Neale (1987). “Experts, Amateurs, and Real Estate: An Anchoring-and-Adjustment Perspective on Property Pricing Decisions.” Organizational Behavior and Human Decision Processes 84, 87-93.

Scalping in the Age of Craigslist

Writing in The New York Times, Ben Sisario has an eye-opening piece on online ticket scalping. Among the revelations:
• Miley Cyrus' upcoming tour will use paperless ticketing and require photo ID, moves intended to prevent the reselling of tickets. Scalper Don Vaccaro called it "a career-ending situation" -- for Miley Cyrus, that is.
• One recent report claims that 40 percent of tickets sold on online resell sites go for face value or less.
• Many online sites exaggerate their inventory. They advertise tickets owned by other online sites; in the event of a sale, both sites share in the profit. The consumer never knows who he's buying from.
• When popular shows sell out within minutes, it "educates" buyers to bypass official channels:

David Kronstat, a 43-year-old music fan in New Jersey, said he hasn’t placed a Ticketmaster order in years “because of how convoluted the whole ticket-buying process has come.” Instead he scours Craigslist, trying to avoid brokers by looking for telltale signs of ordinary Joes motivated to sell. “There’s always some guy who bought four tickets and can only use two, or can’t get a baby sitter,” he said. (When told about those lines, one broker said, “That’s all stuff that I write on Craigslist.”)

Answer: Who Paid for the Beers?

Most people reason that, since the man is getting something for a net cost of nothing, it is the bars that are being cheated out of beer. Another answer shifts the cost onto the banks or exchange companies. But the banks are not offering these exchange rates as an act of charity to border-town alcoholics. (Very little that banks do is an act of charity, actually.) They presumably have a reason for offering these rates. The best answer to the puzzle is that the man earns his beers by returning currency to its issuing nation.
Look at it this way. An alien walks into a bar and tries to buy a drink with an Alpha Centauri zlorqat. “Whoa, buddy!” says the bartender. “Pay up in American money or vamoose!” The bartender has a point. He will not be able to spend an Alpha Centauri zlorqat on earth. It is not general knowledge on this planet that there is intelligent life on Alpha Centauri, much less that they have an economic system based on a currency answering the description of what the alien has offered. The “culture of belief” in the value of the Alpha Centaurian zlorqat does not reach this far. To spend a zlorqat, the bartender would either have to travel to Alpha Centauri or find an exchange company or currency trader willing to make the trip for him. Both alternatives will be expensive, if not impossible.
The value of the U.S. dollar also diminishes beyond the U.S. border. It does not diminish much, given that it is a benchmark currency of a global economy. Still, it is sometimes difficult to find somebody willing to accept a U.S. dollar outside the U.S. There are situations where a U.S. dollar will not be accepted at all. This diminished spendability is reflected in the lower rate offered for U.S. dollars outside of the country. The Canadian bartender in the story is effectively saying, “We know this U.S. dollar is worth as much as a Canadian dollar, but it’s occasionally a hassle to spend it here. We’ll pay you ten cents to take it back to the U.S., where it will regain its full value.” This is how the man earns his beers.
Conceptually, the situation isn't so odd. Every country overvalues its own currency, compared to how it’s valued elsewhere. This near-universal fact is simply more apparent here because (a) the U.S. and Canada both happen to call their currency dollars and (b) the two are worth approximately the same. The puzzle is unrealistic, however, in that order towns with open borders rarely observe the official exchange rates. In a community where both U.S. and Canadian dollars commonly circulate, and where you can walk across the border without passing customs, it’s likely that everyone would value the two currencies at parity.

Who Paid for the Beers?

There was a time when U.S. banks valued the Canadian dollar at $0.90 American, and Canadian banks returned the favor by valuing the U.S. dollar at $0.90 Canadian. This inspired the following puzzle. I’ll give my answer next week.
A man walked into a bar in International Falls, Minn., U.S., and ordered a 10-cent beer (such was the price at the time.) He paid the bartender a U.S. dollar and a got a Canadian dollar in change (for of course both currencies freely circulate in the cosmopolitan community of International Falls.) The man then walked across the border into Canada, ducked into another bar, and ordered a beer. It too cost 10 cents (Canadian). The man paid by giving the bartender the Canadian dollar he’d been given, and got a U.S. dollar in change.
You get the picture. The man then went back to the U.S. side, bought another beer the same way, then returned to the Canadian bar. By the end of the day, he was falling-down drunk, with $1 American in his pocket.
Who really paid for the man’s beers?

Why Stand in Line for Cheap Broadway Tickets?

The New York Times has an interview with Victoria Bailey, executive director of the organization that operates the TKTS Booth. The Booth's long lines (for discount Broadway tickets) have always been an anomaly. If tourists are willing to stand in line hours in sauna-like heat, why not charge a higher price for tickets (and have shorter lines)? One answer: Fairness research has shown that most people regard lines as "fair" and higher market prices less so. The New York Times' Erik Piepenberg asked Bailey about the lines and got this:

Our mission is in large part to promote conversations about theater. You do that in person. The booth is kind of a town square. About 30 to 35 percent of people there are first-time Broadway attendees. There is anxiety about what to see. You hear those conversations within a few minutes of getting there.

It’s hard to believe because the lines are moving so quickly but almost every transaction involves a series of questions: “I’m interested in ABC show, but which show has the best seats or the steepest discounts?” There is an urban fellowship about that experience.

Fourth Circle of Hell (Home Edition)

In George Loewenstein's classification, people can be divided into "tightwads" and "spendthrifts." Tightwads feel an excess of pain when spending money and thus spend less. Spendthrifts don't feel enough pain and overspend. In both cases, the gut reaction to spending money biases, and sometimes trumps, rational budgeting. A new study by Scott Rick, Deborah Small, and Eli Finkel finds that spendthrifts tend to marry tightwads, and vice-versa. That may not be a good thing — "In spite of this initial attraction," the authors write, "spendthrift/tightwad differences within a marriage predict disagreements over finances, which in turn predict diminished marital well-being." The article begins with this quote from Dante's description of the Fourth Circle of Hell:

I saw a nation of lost souls…they strained their chests against enormous weights, and with mad howls rolled them at one another. Then in haste they rolled them back, one party shouting out: “Why do you hoard?” and the other: “Why do you waste?”