The Price of Everything - Eduardo Porter [15]
Frequent sales and markups also serve as tools to keep customers from working out where the cheapest box of cereal is sold. A study in Israel of four similar products sold across a range of stores from 1993 to 1996 found an enormous variation in prices. Not only did the same can of coffee or bag of flour cost more than twice as much at the most expensive store as at the cheapest; it wasn’t always cheapest in the same store. Retailers kept moving the prices around to keep shoppers on their toes.
Even the Internet, a technology that was meant to empower the twenty-first-century consumer by allowing us to compare prices around the world at the click of a mouse, can cloud consumers’ understanding. Online retailers of computer chips will muddle product descriptions and offer dozens of different versions to make it tough to comparison shop. They add large and hidden shipping and handling costs, surround products with a cloud of add-ons that have to be stripped out, and offer low-quality products to lure customers to their Web sites and, once there, get them to upgrade.
Some retailers have even figured out how to trick the shop-bots used by price search engines to make them think they are giving the product away for free and appear at the top of the search rankings. Rather than foment transparency, the Internet has encouraged retailers to cheat. Whoever offered a decent product at a fair price would be buried under a pile of “cheaper” superspecial offers by less honorable rivals.
SEARCHING FOR FOOLS
The killer tactic to identify and reel in the highest-paying customer in a crowd remains the auction. Auctions are designed to find the customer who places the highest value on whatever item is on the block. Daniel Kahneman, the Israeli psychologist who won the Nobel Prize for economics for researching the behavioral quirks that can lead our economic judgment astray, called auctions a tool to “search for fools.” That’s why sellers love them but buyers don’t. A 2006 poll of private equity firms found that 90 percent of them preferred to avoid auctions when buying a company, but 80 to 90 percent favored using them when selling one. The fabled American investor Warren Buffett never omits the warning in Berkshire Hathaway’s annual report: “We don’t participate in auctions.”
They are not necessarily a bad deal for buyers. But buying at auction can be tricky when the value of what’s for sale is unknown. For instance, consider a government auction for the right to exploit the airwaves or drill oil wells. If all the bidders know what they are doing, chances are the average bid will reflect the value at which the average oil company or telecommunications firm could profitably exploit the rights. But that means that the winning bid—which will necessarily be above average—will exceed this value. If this is the case, the odds are high that the winner will lose money. That’s why it’s known as the winner’s curse.
The auction, however, is not the only technique available to lure high-paying consumers. In fact, corporations have many subtle and elegant ways to segregate them according to their willingness to pay and exact a higher price from those who value their items most.
Consider, for a moment, how people shop. According to a study of Denver shoppers, families that make more than $70,000 a year pay 5 percent more for the same set of goods than families making less than $30,000. Singles without children pay 10 percent less than families with five members or more.