Transcript Demonstrate the effect of 0

Prices Roundness and Price Rigidity
Presenter: Haipeng (Allan) Chen
Texas A&M University
Avichai Snir
Bar-Ilan University
Daniel Levy
Bar-Ilan University, Emory University, and RCEA
National Tsing Hua University
Hsinchu, Taiwan, April 22 2014
Frequency Distribution of the Last Digit, Dominick’s,
Regular Prices, Stores #8, #12, #122 and #133
2
Source: Levy, Lee, Chen, Kauffman and Bergen (2011)
Frequency Distribution of the Last
Two Digits in the Internet Data
Percentage of Price Ending (%)
30
25
20
15
10
5
0
0
10
20
30
40
50
60
Price Ending in Cents (¢)
Source: Levy et al. (2011)
3
70
80
90
Why 9-ending?
• “Change-making” story
• Truncation (Manning and Sprott 2009; Thomas and
Morwitz 2005; Schindler and Kirby 1997; Schindler and
Kibarian 1993; Schindler and Wiman 1989; Lambert
1975; Gabor and Granger 1964)
– Left-digit effect
• Signaling (Schindler 2006, 1991; Anderson and Simester
2003; Stiving 2000; Stiving and Winer 1997; Schindler
and Warren 1988)
– Right-digit effect
4
Price Points => Rigidity
Supermarket Data
9¢
99¢
-40%
-24%
9¢
-32%
Internet Data
$9.99
99¢
-45%
-59%
$99.99
-73%
Source: Levy et al. (2011)
• Price points: One of leading theories of price rigidity (Blinder et al. 1998)
• Price points contributes more to price rigidity than menu costs.
• Once the effect of price points is accounted for, “menu costs are
largely irrelevant as a source of price rigidity ” (Knotek 2010).
5
Convenient Pricing
• Knotek (2008, 2011):
– Convenient prices
• In convenience stores, automatic vending machines, kiosks, …
– Prevalence of round prices and other prices that minimize
transaction costs
– Transaction costs = minimum # of coins required to
complete a transaction
– Convenient prices are more rigid than other prices
• We offer another explanation
– Perceptual convenience (vs. “transaction convenience”)
• Price roundness
6
Unique pricing regulation in Israel
• The legal tender in Israel is the New Israeli Shekel (NIS), introduced in
1985.
• The current denominations include NIS 0.10, NIS 0.50, NIS 1, NIS 2,
NIS 5 and NIS 10 coins and NIS 20, NIS 50, NIS 100 and NIS 200 notes.
• The NIS 0.01 (1 agora) and the NIS 0.05 (5 agora) coins ceased to be
legal tender in 1991 and 2008, respectively.
• Although the NIS 0.01 and NIS 0.05 coins are no longer in use, until
very recently (Dec. 2013) retailers were free to set any prices and use
any price ending.
– When a consumer used an electronic payment device, such as a credit-card, she
paid the exact amount.
– When a consumer paid with cash, the total transaction price was rounded to the
nearest NIS 0.10.
– For example, in all cash transactions priced between 4.45 NIS and 4.54 NIS, the
consumer paid the rounded price of 4.50 NIS.
7
Note: The legal tender in Israel is the New Israeli Shekel (NIS), introduced in 1985. The current
denominations include 0.10, 0.50, 1, 2, 5 and 10 NIS coins and 20, 50, 100 and 200 NIS notes.
The 0.01 NIS coin ceased to be a legal tender in 1991 and the 0.05 NIS coin ceased to be a
legal tender in 2008.
8
Note: The legal tender in Israel is the New Israeli Shekel (NIS), introduced in 1985. The current
denominations include 0.10, 0.50, 1, 2, 5 and 10 NIS coins and 20, 50, 100 and 200 NIS notes.
The 0.01 NIS coin ceased to be a legal tender in 1991 and the 0.05 NIS coin ceased to be a
legal tender in 2008.
9
What we see in Israel …
• 9-ending prices in large stores
• 0-ending prices in convenience outlets
• The same patterns as in the U.S.
supermarkets and convenience stores,
respectively
• And, the changes in popularity of 9-ending
and 0-ending prices do not coincide with
the elimination of 0.01 and the 0.05 coins
• Is this expected?
10
Puzzle
• Recall:
– 9-ending prices may be perceived as much lower than what they are.
– 9-ending prices may signal “something is on sale!”
– In the meantime, in Israel a 9-ending price (e.g., 4.99) would be almost
the same as the next round price (i.e., 5.00)
• Especially in convenience stores where most consumers may pay with cash.
• Israeli convenience outlets should use 9-ending prices to
leverage these perceptual advantages of 9-ending prices,
without sacrificing (much) profit.
• In other words, since a nine-ending price (e.g., 4.99)
requires the same number of coins as the approximate
round price (i.e., 5.00), the popularity of 0-ending prices
in Israeli convenience stores cannot be explained by
“transaction convenience” (# of coins).
11
Perceptual Convenience
• Knotek (2011)
– Suspected that “psychologically convenient prices may yield convenient
transactions as well.”
– But claims that “it may be impossible or unnecessary to completely separate
convenient transaction prices from convenient psychological prices.”
– Called for more research on this issue.
“The fact that round, convenient prices are more likely to be recalled than price points … raises
the possibility that customer recall and memory may play an important role in explaining price
rigidity and flexibility at the microeconomic level.”
– Also called for studies of convenient price in “countries with distinct
monetary systems.”
• We study the role of perceptual convenience
– That is, price roundness
– In the prevalence and rigidity of convenient prices
– Using data from the U.S. and Israel (i.e., two countries with distinct monetary
systems).
12
0 is Special
• Its special role as a number (Schindler and Kirby 1997).
• Its shape satisfies the Gestalt principles of roundness or completeness
(Treisman and Gelade, 1980).
• It is processed differently by consumers (Heyman and Ariely 2004).
• People use zero-ending numbers as cognitive references points (Rosch
1975)
• Professional baseball players more likely to walk if their batting average is
just below .300, but more likely to have substitutes play for them when
their batting average is just above .300 (Pope and Simonsohn 2011).
• SAT test takers are more likely to retake the test if their score is just below
a round number, especially for high school juniors (vs. seniors; Pope and
Simonsohn 2011).
• 57% of the transactions made at the self-service gas station pumps has
final prices that end with .00 (Lynn et al. 2013).
13
The Current Paper …
• Focus on 0-ending prices
• Demonstrate
– Prevalence of 0-ending prices
– Rigidity associated with 0-ending prices
– Reasons for rigidity of 0-ending prices
• Use data from
–
–
–
–
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A lab experiment
A survey of adult consumers
Two secondary datasets
From the U.S. and Israel
Three Types of Evidence
I.
Lab Experiment: U.S. College Students
–
Demonstrate the perceptual advantage of 0-ending
prices
II. Survey: Consumers at Israeli Supermarkets
–
Demonstrate how roundness of 0-ending prices
contributes to perceived convenience
III. Secondary Data Sets:
15
I.
II.
Israeli Central Bureau of Statistics (CBS)
Dominick’s Finer Food from the U.S.
–
Demonstrate the effect of 0-ending on price rigidity
Lab Study
• Design: 2x2x2x4
•
•
•
•
2 (numbers of digits: three, four), between subjects
2 (stimuli types: number, price), between subjects
2 (task type: find small, find large), between subjects
4 (locations for the different digit: none, left-most, middle, right-most digit),
within-subject
• N=206 undergraduate business students at TAMU
• Could receive up to $10 for performance
• If they used 1 second or less per comparison (5 cents penalty for
each additional second)
• AND made no mistakes (10 cents penalty for each mistake)
• A trial run and 4 experimental blocks
• 75 comparisons in each block
• Press A for left, L for right and the space bar if the two numbers/prices are the same
• Key measures:
16
• Accuracy
• Response time
17
+
18
5.47
19
5.49
20
+
21
5.47
22
5.49
Lab Results
Response time
Zero-Ending
(1)
(2)
(3)
(4)
-77.05***
-77.80***
0.17***
0.14***
(5.304)
(5.319)
(0.033)
(0.033)
Finding large vs. Finding small
3 vs. 4 digits
Price vs. Number
-55.63***
0.28***
(21.928)
(0.086)
-259.16***
0.03
(22.09)
(0.083)
-50.85**
-0.03
(21.975)
(0.082)
Difference between the two
-1.39*
-0.04***
prices/numbers
(0.718)
(0.004)
36.61
0.14
(23.511)
(0.088)
39.59
-0.34***
(27.199)
(0.091)
-12.536***
0.005
(3.887)
(0.008)
Woman
Shops less than once a month
Age
Constant
χ2
Observations
23
Accuracy
Subjects
1042.12***
1446.61***
1.482***
1.131***
(14.630)
(85.137)
(0.446)
(0.222)
211***
383***
26.25***
176***
55,346
55,346
55,346
55,346
206
206
206
206
Survey of Adult Consumers
• 393 consumers at large shopping centers in Israel (May – July 2012)
– Average age=32
– 26% women
– 33% usually pay with cash
• Compared 68 pairs of prices and indicated preference
– 0.10 ~ 15 New Israeli Shekel (NIS; 1 USD=3.70 NIS as of June 6, 2013)
• These prices are usually paid with coins because their value is smaller than the smallest
banknote (20 NIS).
• The average price in the sample was 4.83 NIS.
• The minimum difference between any pair of prices was 0.01 NIS.
• The maximum difference was 5 NIS.
• The average difference was 1 NIS.
• If there were significant differences between two prices, participants were told that the
difference in the prices was due to differences in quantity.
• Then ranked the six existing coin denominations (10, 5, 2, 1, 0.50 and
0.10 NIS) from the most convenient to the least convenient.
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– Used to construct another index of “coin convenience” (= # of coins weighted by
their perceived inconvenience).
Rank order of coin convenience
Coin
Average
Standard-
(NIS)
Rank
Deviation
10
1.81
1.216
5
1.91
0.828
2
3.46
1.023
1
3.11
1.183
0.50
4.81
0.776
0.10
5.72
0.865
t-statistic for Equality of Means
0.75
23.82***
3.89***
26.33***
20.11***
Notes: The average convenience ranking assigned by survey respondents to each coin. The t-test scores are for testing the hypothesis that the
average score given to a coin is not different from the score of the next coin. *, **, and *** indicate statistical significance at 10%, 5%, and 1%,
respectively.
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Results on Preferences
(1)
(2)
(3)
(4)
(5)
(6)
0.57***
0.52***
0.59***
0.49***
0.56***
0.52***
(0.010)
(0.034)
(0.016)
(0.048)
(0.010)
(0.034)
Transaction-
-0.005
0.006
-0.17***
-0.16***
inconvenience
(0.005)
(0.18)
(0.015)
(0.049)
-0.27***
-0.31***
-1.96***
-2.84***
-0.27***
-0.31***
(0.0546)
(0.019)
(0.359)
(1.167)
(0.005)
(0.019)
0.13***
0.13***
0.14***
0.12***
0.13
0.12***
(0.0190)
(0.022)
(0.021)
(0.023)
(0.013)
(0.022)
Weighted
-0.002*
0.001
Coin-inconvenience
(0.0009)
(0.003)
Difference between the two prices in:
Roundness
Prices
9-Ending Index
Note: Results of random-effect probit regressions on the probability that a participant picked a price as the more
convenient. Standard errors are reported in parentheses.
In Column (2) we add controls for the interaction between coin-inconvenience, roundness and participants’ gender, age and the
dummy that equals 1 if a participant mostly uses cash rather than credit cards.
In Columns (3) and (4) we restricted the analysis to prices with a difference of less than 0.10 NIS.
In Columns (5) and (6) we use a different measure of coin-inconvenience. That is, # of coins weighted by the perceived
convenience of each coin.
*: p<.10; **: p<.05; ***: p<.01
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Results – An Illustration
• The probability that participants preferred a price of NIS 5.60
over NIS 5.51 was over 71%
– NIS 5.51 is rounded to 5.50
– So NIS 5.60 is more expensive than NIS 5.51 by NIS 0.10
• The probability that participants preferred a price of NIS 5.56 over NIS
5.51 was about 36%
– NIS 5.56 is rounded to NIS 5.60
– NIS 5.51 is rounded to NIS 5.50
– So the difference between the two prices is also NIS 0.10.
• Thus, Israeli consumers prefer a zero-ending price over a slightly lower
non-zero-ending price (5.60 vs. 5.51).
• But this preference is weakened when the higher price is not zeroending (e.g., 5.56 vs. 5.51).
27
– Even though the real price difference is the same (NIS 0.10).
– And, the difference in the number of coins required is the same.
Secondary Data Set (1)
• Israeli Central Bureau of Statistics (CBS) for compiling the CPI index
– monthly observations on the prices of goods belonging to 18 categories of consumer
goods
– 1999 – 2011
– bag shops, fruit and vegetable stores, shops in gas station, car repair shops, groceries,
kiosks, non-food shops, open market stalls and organic food shops
– Data on the following variables: share of female customers, socio-economic status,
share of Arab-Israelis customers, size of the population, distance from Tel-Aviv and a
periphery index based on the size of the population in the vicinity of the locality, so that
a small town in a densely populated area has a lower periphery index than a small town
in a low density area.
– Total # of observations=127,477
– Average price=39.87 NIS
– Median price=7.50 NIS
– 81% are 0-ending; 51% are 00-ending
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Secondary Data Set (2)
• Dominick’s
–
–
–
–
130 stores; 29 Product Categories; 18,037 SKU’s
1989–1997, Weekly Prices
Over 98 Million observations
Overall, more than 65% 9-ending prices; less than 5% 0-ending prices (Levy, Lee,
Chen, Kauffman and Bergen 2011).
– Front-end candies as a “convenient” product
•
•
•
•
•
•
•
•
29
4,228,852 weekly observations
12% price changes
Average price=$0.61
Modal price=$0.50 (11%)
24% of the prices are 0-ending prices.
19% of the prices end with a multiply of 25 cents but are not 0-ending (i.e. $0.75 and $1.25).
43% of the prices are set at “convenient prices” (i.e., 0 and 5).
39% of the prices are 9 ending.
Results from Israel
Coin-inconvenience
Price roundness
(1)
(2)
0.03*
0.02*
(0.003)
(0.003)
-0.25*
-0.23*
(0.15)
(0.016)
Population
0.004*
(0.0006)
Socio-economic score
-0.003*
(0.0005)
Share of women
-0.008*
(0.001)
Periphery score
-0.12*
(0.002)
Distance from Tel Aviv
0.006*
(0.00008)
Share of Israeli Arabs
-0.002*
(0.002)
Previous price
0.003*
Note: Results of a probit regression on the
probability of a price change. The regression
also includes a full set of dummies for
product category and year fixed effects.
(0.0001)
Constant
30
χ2
Observations
-1.17*
-0.11*
(0.029)
(0.037)
7321*
10341*
127477
1268-0
* p<.01
Results from the U.S.
Likelihood of a price change
Zero ending
-0.18*
(0.003)
Nine ending
-0.79*
(0.003)
Quarter ending
0.10*
(0.003)
Transaction inconvenience
0.11*
(0.0007)
On sale at previous week
1.25*
(0.002)
Constant
-1.52*
(0.003)
χ2
Observations
31
431353.5*
4,228,851
Note: Results of a probit
regression on the probability of
a price change. The regression
also includes a full set of
dummies for product category
and year fixed effects.
* p<.01
Conclusions
• 0-ending prices are prevalent
– in the U.S., and
– in Israel where there is no penny or nickel denomination
• 0-ending prices have perceptual advantages.
– They are processed faster and more accurately.
• 0-ending prices are preferred by consumers.
• And by retailers (they are more rigid).
– In both the U.S. and Israel
• Answering Knotek’s (2011) call for studying convenient pricing in
“countries with distinct monetary systems.”
• These perceptual effects are above and beyond the effects
of transaction convenience.
32
• Answering Knotek’s (2011) call for identifying the transaction vs.
psychological drivers of the prevalence and rigidity of convenient
prices.