Saturday, July 7, 2012

Market Forces

Loyal readers (i.e. Worldwide and G-Lo) will remember that Daniel Kahnemann’s Thinking Fast and Slow was my book of the year for 2011. The key theme in the book is that, due to the effort required to reason through a problem, the brain looks for shortcuts, or heuristics, to enable quick decision making, and that we often use this technique unconsciously, sometimes to our detriment. The book also mentions a well known experiment, called the Dictator Game, where someone is given a sum of money--say $10--and told that s/he must make an offer to share with another person. If the offer is accepted, both parties get to keep their share; if it is refused, no-one does.

Classic economic logic predicts that the offeree should accept any offer, because it yields them something for nothing. But experiments have shown that people will reject offers that they consider unfair: if you give me $1, I will take it, but if you offer to split your $10, 9 for you, 1 for me, I will refuse. The math of the situation is identical, and yet, there is something in our brain that uses our own concept of “fairness” to override acting rationally. This is one of the basic tenets of behavioural economics, for which Kahnemann won a Nobel prize.

Which brings me to the grocery store. Like most people, I have a loyalty card for Harris Teeter, our local supermarket. This entitles me to valuable discounts in return for them knowing everything about what we eat and drink at home. A little Kafkaesque, but, in my view a fair trade, particularly since the pricing structure in the store dramatically favours the VIC (Very Important Customer) card holder.

They have also trained the cashiers to automatically conclude every purchase with a “You saved $xx” and I applaud them for the success of their implementation; it is a rare day when someone fails to acknowledge my excellent shopping habits.

But lurking below the surface is a monstrous deception; an elaborate con-game in which the supermarket moguls try to separate us from our cash using the latest data from behavioural economics.

Here are two of the heuristics that I apply to get in and out of the grocery store in a hurry.

  1. Something discounted is a better deal
  2. Larger quantities are cheaper on a per unit basis

The truth is much different. For instance, Worldwide and the Gs love the store’s blueberry muffins (have you noticed that most stores have the bakery and deli alongside the produce now? That is because it creates an impression of freshness, which leads us to think of blueberry muffins topped with a sugary glaze as healthy, which they are not). The muffins today were “on sale" for $3.47 for a 4 pack, marked down from the regular price of $4.99. This lowers the unit cost to about $0.87/muffin--not as expensive as the $3 it might cost you at Starbucks, but five times more than the banana across the aisle. But since the price is 30% lower...

Except that it isn’t. The muffins are always priced at $3.47. In two years of buying them weekly I have never seen them at any other price. The only change is that, about 4 months ago, someone decided that the regular price should be $4.99, instead of $3.99, which had been the asking price for most of last year. So my local grocer just saved me an extra $1/week. Wow, thanks. I can just see the newly minted MBA at next week’s staff meeting making a pitch to use the Starbuck’s price as the benchmark. Think of the savings for the hoi polloi!

The second heuristic--that larger packages are cheaper--is equally fiendish, because it is true in some cases, but not all, and there doesn’t seem to be any pattern in the data. For instance, although Worldwide consumes enough Half and Half with her morning coffee to warrant the purchase of the half gallon carton, the quart is always $0.30 less per quart. But this does not hold true for the milk. And to make it worse, when I was comparing two boxes of soft pretzels (a staple in the OG’s school lunches) the 25-unit box gave me a per pretzel unit cost in easy to read 6 point font, while the 6-unit box was per ounce. What’s the deal? Are the preztels in each box the same size? Are the ingredients different? Should I ask the manager?

I threw up my hands and walked away; which is also an available heuristic. But we gotta eat something. Whole Foods doesn’t have loyalty cards; but their prices are higher, although their produce is better, and their milk is cheaper. My head hurts.

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