Prada stores carry a few obscenely expensive items in order to boost sales for everything else (which look like bargains in comparison). People used to download music for free, then Steve Jobs convinced them to pay. How? By charging 99 cents. That price has a hypnotic effect: the profit margin of the 99 Cents Only store is twice that of Wal-Mart. Why do text messages cost money, while e-mails are free? Why do jars of peanut butter keep getting smaller in order to keep the price the “same”? The answer is simple: prices are a collective hallucination.
In Priceless, the bestselling author William Poundstone reveals the hidden psychology of value. In psychological experiments, people are unable to estimate “fair” prices accurately and are strongly influenced by the unconscious, irrational, and politically incorrect. It hasn’t taken long for marketers to apply these findings. “Price consultants” advise retailers on how to convince consumers to pay more for less, and negotiation coaches offer similar advice for businesspeople cutting deals. The new psychology of price dictates the design of price tags, menus, rebates, “sale” ads, cell phone plans, supermarket aisles, real estate offers, wage packages, tort demands, and corporate buyouts. Prices are the most pervasive hidden persuaders of all. Rooted in the emerging field of behavioral decision theory, Priceless should prove indispensable to anyone who negotiates.
read whole essay at source – excerpt:
…“We have got one equation for two unknowns. Unless we can get some independent evidence about preferences the experiment is no good. But it was the experiment that we were supposed to rely on to observe the preferences.” (p51)
Let me just restate what Robinson has just pointed out so that people are crystal clear on this point. Marginalist doctrine claims that we cannot measure utility directly. We know of a person’s utility only due to the fact that they buy something — this is called ‘revealed preferences‘ in the literature. So, we only know the cause — i.e. the utility of a purchase — by the effect it produces — i.e. the actual purchase that is made by the consumer. If we consider preferences as being fixed then this makes some sense. But if we allow that preferences fluctuate the whole edifice falls apart because now we cannot be sure to what extent consumer decisions have changed due to price changes and to what extent they have changed due to a change in preferences.
My feeling is that if this was pointed out to, for example, Marshall or Samuelson they would have conceded the problem to undermine marginal utility theory as they had sharp minds and actually understood the structure of theories that they were dealing with. Most marginalists today, who tend to be exceptionally poor at basic logic, cannot understand this criticism at all. …
In reality the theory of marginal utility is entirely without substance. All it provides is a set of puzzles that would-be economists spend vast amounts of time trying to solve. The theory of marginal utility is not, despite appearances, an economic theory. At best it is a parlor game played by economists; at worst it is a doctrine which seeks to morally shape the minds of men.
What’s worse today, since the so-called microfoundations critiques (another doctrine that is internally logically inconsistent), economics is using utility nonsense even in the sphere of macroeconomics. Meanwhile, figures like Gary Becker are attempting to colonise other social sciences with these incoherent dogmas. Unfortunately, Robinson didn’t see just how polluting the marginalist doctrines could possibly be.
Marginalist doctrine claims that we cannot measure utility directly. We know of a person’s utility only due to the fact that they buy something — this is called ‘revealed preferences‘ in the literature. So, we only know the cause — i.e. the utility of a purchase — by the effect it produces — i.e. the actual purchase that is made by the consumer. If we consider preferences as being fixed then this makes some sense. But if we allow that preferences fluctuate the whole edifice falls apart because now we cannot be sure to what extent consumer decisions have changed due to price changes and to what extent they have changed due to a change in preferences.
I have written extensively on marginal utility theory before. Here are what I consider to be the most important things I have written — I list them in order of importance.
tandfonline.com 2019 Graslin’s Subjective Theory of Value as Elaborated in His Debate with a ‘Blind Enthusiast’ of Physiocracy in 1767
J.-J.-L. Graslin, an ‘anti-economist’, who fundamentally criticized physiocratic doctrine, and N. Baudeau, described as a ‘blind enthusiast’ of Physiocracy, started an open controversy in journals over the value of the processing industry in 1767. The purpose of this paper is to clarify the historical significance of their short-term controversy and Graslin’s far-sighted subjective theory of value confronting Physiocracy. As with other physiocrats, Baudeau insisted on the sterility of industry because it does not produce any net product. Baudeau argued that the value of a processed product was composed of two values: the value of materials and that of food for labour. By contrast, Graslin maintained that the value of labour must be considered separately from the value of food for labour. According to Graslin, labour that processes raw materials generates new value beyond the value of those materials, in the same way that agricultural labour generates value; therefore, the former type of labour is not sterile. The controversy symbolizes a preliminary confrontation between the upcoming cost theory of value and the subsequent subjective theory of value. On the latter, Graslin produces a table similar to Carl Menger’s table of needs satisfaction.