Do Consumers Perceive Precise Prices to be Lower than Round Prices? Evidence from Laboratory and Market Data

32 Pages Posted: 8 Jan 2008 Last revised: 10 Jun 2011

Manoj Thomas

Cornell University - Samuel Curtis Johnson Graduate School of Management

Daniel H. Simon

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Vrinda Kadiyali

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: September 2007

Abstract

We examine two questions: Does precision or roundedness of prices bias magnitude judgments? If so, do these biased judgments affect buyer behavior? In a laboratory pre-test, we find that people incorrectly judge precise prices (e.g., $325,425) to be lower than round prices of similar magnitudes (e.g., $325,000). Building on evidence of greater prevalence of precision in smaller numbers and roundedness in larger numbers (Dehaene and Mehler 1992), we suggest that representativeness of digit patterns might influence magnitude judgments. We term this the precision heuristic in price magnitude judgments. We examine the effect of this precision heuristic on buyer's willingness to pay (WTP) in two distinct but complementary ways. First, we conduct a laboratory study to understand the psychological mechanism behind the precision heuristic. We find that people do learn to associate precision with smaller magnitudes, and that this association biases their price magnitude judgments. Additionally, we rule out alternative explanations which posit that a precise price signals a seller's low-price strategy or her unwillingness to negotiate. Based on these findings, we suggest that although the precision heuristic can lead to biased judgments, it is an ecologically valid judgment criterion. Next, using data from more than 27,000 residential real estate transactions in two separate markets, we find that buyers pay higher sale prices when list prices are more precise. This finding is consistent with the precision heuristic, suggesting that buyers perceive precise list prices to be lower, and therefore accept sale prices that are closer to the list price. These results have substantive implications for buyer and seller behaviors, and theoretical implications for the understanding of price cognition process.

Keywords: price magnitude judgments, representativeness, precision heuristic

Suggested Citation

Thomas, Manoj and Simon, Daniel H. and Kadiyali, Vrinda, Do Consumers Perceive Precise Prices to be Lower than Round Prices? Evidence from Laboratory and Market Data (September 2007). Johnson School at Cornell University Research Paper No. 09-07. Available at SSRN: https://ssrn.com/abstract=1011232 or http://dx.doi.org/10.2139/ssrn.1011232

Manoj Thomas (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

353 Sage Hall
Ithaca, NY 14853
United States
607-255-7207 (Phone)
607-254-4590 (Fax)

HOME PAGE: http://forum.johnson.cornell.edu/faculty/mthomas/

Daniel H. Simon

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Vrinda Kadiyali

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-1985 (Phone)
607-254-4590 (Fax)

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