Saturday, June 05, 2010

Framing Makes a Difference

Source: The Economist
A new study* for the Office of Fair Trading, Britain’s main competition-policy watchdog, seems to confirm that the way prices are presented, or “framed”, can tempt consumers into error. Its authors, Steffen Huck and Brian Wallace of University College London (UCL), and Charlotte Duke of London Economics, a consultancy, base that finding on a controlled experiment. They tested responses to five different price frames: “drip pricing”, where only part of the price is revealed at first and extra charges are levied as the sale progresses (think of buying an airline ticket online); “sales”, where the price is contrasted with a higher price (was $2, now $1); “complex pricing”, such as three-for-two offers, where the unit price has to be worked out; “baiting”, where a cheap deal is advertised but restricted to a few lucky shoppers; and “time-limited offers” that are available for a short period......

How did shoppers fare? Faced with per-unit prices, shoppers made the right choices four times out of five. But when errors were made they were costly. The average lost pay-off per round compared with the best strategy was enough to cut the maximum score by a quarter. The errors were still larger in the rounds where prices were framed differently. The authors calculated the additional loss each subject suffered in response to each price frame compared with the baseline case. The average extra loss was then used to rank the five price frames. Shoppers were worst off under drip pricing, followed by time-limited offers, baiting, sales and complex pricing.
Comment: Of course retailers have been working hard for a long time figuring out how to price things, and I suppose buyers have also been learning which framings to avoid. Still it is nice to see controlled experimental evidence added to the body of information demonstrating that people act more or less irrationally according to the way their decisions are framed.

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