![]() If people had no memory of past prices, the consumption of milk and wine would remain essentially the same, as if the prices had not changed. I suspect that the price changes would make a huge impact on demand if people remembered the previous prices and noticed the price increases but I also suspect that without a memory for past prices, these price changes would have a trivial effect, if any, on demand. What if the new taxes are accompanied by induced amnesia for the previous prices of wine and milk? What if the prices change in the same way, but you do not remember what you paid for these two products in, the past? What do you think will happen? These price changes will surely affect consumption, and many people will walk around slightly happier and with less calcium. One will cut the price of wine by 50 percent, and the other will increase the price of milk by 100 percent. Now imagine that two new taxes will be introduced tomorrow. Consider your current consumption of milk and wine. In the framework of arbitrary coherence, the relationships we see in the marketplace between demand and supply (for example, buying more yogurt when it is discounted) are based not on preferences but on memory. What this means is that demand is not, in fact, a completely separate force from supply.Īnd this is not the end of the story. It seems then that instead of consumers’ willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers’ willingness to pay. In the real world, anchoring comes from manufacturer’s suggested retail prices (MSRPs), advertised prices, promotions, product introductions, etc-all of which are supply-side variables. ![]() Second, whereas the standard economic framework assumes that the forces of supply and demand are independent, the type of anchoring manipulations we have shown here suggest that they are, in fact, dependent. But as our experiments demonstrate, what consumers are willing to pay can easily be manipulated, and this means that consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences. First, according to the standard economic framework, consumers’ willingness to pay is one of the two inputs that determine market prices (this is the demand). The results of all the experiments presented in this chapter (and the basic idea of arbitrary coherence itself) challenge these assumptions. This is an elegant idea, but it depends centrally on the assumption that the two forces are independent and that together they produce the market price. The price at which these two forces meet determines the prices in the marketplace. Traditional economics assumes that prices of products in the market are determined by a balance between two forces: production at each price (supply) and the desire of those with purchasing power at each price (demand). “All this talk about anchors and goslings has larger implications than consumer preferences, however. ![]() In a must-read book “ Predictably Irrational”, the author, Dan Ariely, writes on the principle of “arbitrary coherence”. ![]()
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