Almost two-thirds of retail prices end in a nine on some estimates. These “charm prices”—set just below a round number—are meant to lead consumers to round down rather than up. While some doubt their effectiveness, plainly Steve Jobs is a believer, insisting initially that all tracks on iTunes be priced at 99 cents, as is Jeff Bezos, whose Kindle was first priced at $359, later $299 and then $259.
In “Priceless,” William Poundstone explains charm prices and other common pricing anomalies. More broadly, he explores some of the basic notions of behavioral economics and argues that psychology matters as much as logic in many simple economic decisions. Most prices, Mr. Poundstone notes, are not the result of exact science but are “slippery and contingent,” relying on “coherent arbitrariness”: Consumers don’t know the “right” price for anything and mainly respond to price increases and the price of one thing compared with another.
While Mr. Poundstone explains the increasingly sophisticated techniques that businesses use to exploit human irrationality, he says little about the effect that the rise of e-commerce may have on all this pricing strategy. While there may still be some scope for psychological manipulation, consumers should be harder to confuse with access to instant price comparisons and product research online. Relatedly, the Web may offer opportunities for better customer segmentation and hence finer price differentiation—where prices take into account each consumer’s willingness to pay. Why give everyone a discount when some people will pay full price? Perhaps the customer that searched for “highest rated” will pay more than someone who searched for “lowest price.” Tailored offers and customized bundles can muddy the water for comparisons. As Robert Crandall, a former CEO of American Airlines, has said: “If I have 2,000 customers on a given route and 400 different prices, I’m obviously short 1,600.”
