Retailers have long known that tiny changes in price can have a huge impact on consumer psychology. An item listed at $9.99 sounds a lot cheaper than one listed at $10. But does this effect ever pop up anywhere else?
In the used-car market, apparently. A new paper from the National Bureau for Economic Research finds that the price of used cars plummets by about $448 on average every time it crosses a 10,000-mile threshold on the odometer. That’s fairly unexpected. A car with 29,999 miles on it isn’t that much more valuable than a car with 30,000 miles on it. “These changes in prices,” the authors conclude, “appear to be driven by changes in consumer perception of vehicle value.”
This research follows up on a 2011 paper by Nicholas Lacetera, Devin Pope and Justin Sydnor, which found a similar effect for wholesale car prices. In an essay on the phenomenon, the study’s co-authors chalk this up to our limited attention spans — buyers tend to focus on left-hand digits and not the right-hand digits when looking at mileage. At a glance, a car with 20,001 miles on it seems much less valuable than a car with 19,999 miles.
For the car market, at least, the aggregate impact is fairly large. Looking at just 22 million car auctions, the authors estimated that the cars they studied were mispriced by about $2.4 billion because of this right-digit bias. They also offered a chart showing the discontinuities:
In any case, it’s a minor study in the grand scheme of things, though the authors wonder if similar biases might pop up in other settings, such as “hiring or admissions decisions based on GPAs and test scores, the evaluation of companies based on financial reports (e.g., revenues), the treatment of medical test results, and how the public reacts to government spending programmes.”
–By the way, here’s a fascinating old piece about economists who wonder why prices ending in “9″ seem to have such a strange psychological effect on consumers. One notable finding: “At the University of Chicago, for instance, researchers found that when the price of margarine dropped from 89 cents to 71 cents at a local grocery chain, sales improved 65 percent, but that when the price fell to 69 cents, sales rose 222 percent.”