Coca Cola

I recently noticed an interesting pricing strategy followed by Coca Cola: at my local One Stop grocery store, a 2 litre bottle costs £1.99. But if you buy two bottles, together they cost just £2.50. The second bottle cost 51p - a quarter of the first one!

Needless to say, I bought two. Who wouldn't? 51p for two litres of coke is a great deal! How do we know it's a great deal? Because it would usually cost £1.99!

Very, very clever pricing strategy. (Charging £1.25 per bottle, regardless of quantity, would probably result if far fewer sales.)

They increase sales by anchoring our view of the innate value of a bottle of coke high (£1.99) before smashing it with a 51p deal - of course it's a great deal! (And the great deal feeling will probably increase the likelihood of buying coke again.) Additionally, I knew I only needed one bottle, but I felt that after investing £1.99 I might as well reap the rewards and put in another 51p. (The sunk cost fallacy).

Cold Beer

The following question was originally posed by Richard Thaler (1985):

You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favourite brand of beer. A companion gets up to go make a phone call and offers to bring back a beer from the only nearby place where beer is sold (a fancy hotel). He says that the beer might be expensive and so asks how much you are willing to pay for the beer. He says that he will buy the beer if it costs as much or less than the price you state. But if it costs more than the price you state he will not buy it. You trust your friend, and there is no possibility of him bargaining with the bartender. What price do you tell him?

Now imagine instead of there being a fancy hotel there is only a small, run down grocery store. What price do you tell him?

In the experiment half those questioned were told it was a fancy hotel, half were told the grocery store. Interestingly, the answers differed.

The median response for the hotel was $2.65 while for the store it was only $1.50 (in 1984 dollars).

This contradicts standard economic theory where our preferences are supposed to be stable, regardless of who we interact with. I should value a beer the same regardless of who sells it to me. But as the example above shows, we use reference points. What we are willing to pay for a beer is not only based on our thirst, but also on our perception of a fair price or a good deal.