Slap the right price tag on a Timex, wax a little rubbing alcohol over the first several letters, etch out a few new characters, and voilà -- you've got a Rolex.
"Perception is everything," goes one marketing mantra; and according to accumulated economic data, the theory holds true in pricing economics. If consumers are told one apple costs $5 while another costs $2, they will often conclude that the $5 apple must be better than the other apple.
Before gouging prices to increase demand, however, economist Ori Heffetz is quick to warn that the higher prices also can decrease demand – maybe even more so in a recession.
"You have to know how this positive effect of prices on perceptions compares with the possibly large negative effects of higher prices on demand for a specific product," he says.
A recent study that Heffetz, a professor of economics at Cornell University, authored along with Moses Shayo, a professor of economics at the Hebrew University of Jerusalem, found that consumers' perceptions do indeed sway in accordance with prices, but their buying behavior doesn't necessarily follow.
In the study, volunteers in a lab proved that higher prices associated with different candies translated into an elevated perception of value. In a second experiment in which prices of entrees on a prix-fixe menu were altered, the researchers found that people pretty much stuck with what they liked. Because the price for the dinner remained constant, the diners (who were unaware of the ongoing, 14-week-long experiment) might have been expected to opt for whichever dish had the highest value on the a-la-carte menu, whether it be artichoke, pork, sausage, shrimp or a mullet fillet.
The results of the experiment found that increasing the prices of any of the options did not result in an increased demand, and the mullet remained most popular throughout the experiment. "It's one thing to show in a lab setup that I can manipulate you into thinking, feeling, and even doing something by manipulating prices. But it's quite another thing to think that such price effects will be large enough to matter when compared with other economic consequences of manipulating prices," Heffetz says.
It is possible that consumers aren't quite the rubes they were once believed to be, or maybe that placebo effect is finally beginning to wear off – or perhaps palates are just stubborn. Either way, Heffetz says, boosting prices can sink demand as much as it can raise it. "More expensive products might be perceived as more attractive -- which could increase demand -- but they are also more expensive, which turned out, in our study, to decrease demand by much more."