Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why You Pay More for the Same Item at a Different Store
Transcript
- Lucas: You walk into a convenience store, grab a can of soda — costs you a dollar fifty. Same can of soda in a hotel minibar? Four bucks. Same product, same can, same Coca-Cola recipe. Your brain doesn't treat those prices the same way. Luna: Right, because the minibar feels like a rip-off. But if you think about it, both are just a price for a soda. Why does one feel acceptable and the other offensive? Lucas: That's the core of what we're talking about today — a concept called transaction utility. It comes from Richard Thaler, the behavioral economist who won the Nobel a while back. The basic idea: we don't evaluate a purchase based solely on the absolute price. We compare it to a reference price — what we think the item should cost. Luna: So the reference price for a soda in my head is about a dollar fifty. The minibar charges four, so the transaction utility is negative. It feels like a bad deal. Lucas: Exactly. And transaction utility is separate from what economists call acquisition utility — that's the value you get from consuming the good itself. The soda gives you the same refreshment either way. But the deal feels different because the reference price is violated. Luna: What determines that reference price? Is it just what we usually pay, or are there other factors? Lucas: It's mainly past experience and context. You've bought soda at convenience stores your whole life, so that's your anchor. But context matters a lot. A restaurant can charge eight dollars for a glass of wine that costs fifteen at a liquor store, and most people don't bat an eye — because their reference price for restaurant wine is higher. Luna: So the same bottle of wine, same vintage, same producer — but the setting changes what we're willing to accept. That feels like retailers are exploiting our mental accounting. Lucas: They absolutely are. And they're very good at it. Hotels know you have a different reference price for a minibar item because you're captive and you've seen those prices before. But there's a subtler version: the idea that a higher price signals higher cost to the seller, which makes the price seem fair. Luna: There's a study on that, right? From a few years ago — something about people paying more if they think the seller has higher costs. Lucas: Yes, a 2023 paper in the Journal of Consumer Research. Researchers found that people were willing to pay about 30% more for the same product if they believed the seller's costs were higher — even when the product was identical. They used scenarios like a boutique hotel versus a chain motel for a bottle of water. Participants thought the boutique had higher overhead, so a higher price felt justified. Luna: That's fascinating because it means we're not just comparing to our own past prices — we're also doing a kind of fairness calculation. Is the seller's markup reasonable given their costs? Lucas: Exactly. Thaler called it 'perceived fairness.' If the markup seems excessive relative to cost, you feel ripped off — even if you'd happily pay the same amount in a different context. That's why the same $50 bottle of wine at a restaurant feels fine, but a $50 bottle at a liquor store would be outrageous. Luna: So how do we avoid falling for this? I mean, I know I've overpaid at a hotel minibar because I was thirsty and tired. But can we train ourselves to notice the reference price trap? Lucas: One tactic is to consciously ask yourself: what is my reference price for this item in this context? And then compare it to what you'd pay elsewhere. But the real insight is that transaction utility can work in your favor too. If you find a deal that beats your reference price — like a soda on sale for a dollar — you get positive transaction utility. It feels like a win. Luna: That's why loss aversion plays into this. Paying more than your reference feels like a loss. Paying less feels like a gain. Lucas: Right. And companies know this. That's why you see 'suggested retail price' crossed out, with a lower sale price next to it. They're artificially setting a high reference price to make the sale price look like a gain. That's pure transaction utility manipulation. Luna: So the lesson is: be aware of your reference prices, and don't let sellers set them for you. But also recognize that sometimes paying a premium in a certain context is okay — if you value the convenience or the experience. Lucas: Exactly. The goal isn't to never overpay. It's to know when you're choosing to pay more versus being tricked into it. If you're at a restaurant and you order the $12 glass of wine because you want the ambiance and the service, that's a conscious decision. But if you buy a $4 soda from the minibar without thinking? That's the trap. Luna: I think one practical takeaway is to bring your own snacks to hotels. Avoid the reference price violation altogether. Lucas: That's one approach. But I think the bigger lesson is about mental accounting in general. We have separate mental accounts for different categories — food, entertainment, travel — and the reference prices vary by account. Understanding that can help you make better decisions across the board. Luna: Let's talk about another example: buying a used car. The dealer might set a high asking price to anchor your reference. Then when they 'negotiate' down, you feel like you got a deal — even if you still paid above market. Lucas: Classic anchoring effect, which we covered in episode 58. But transaction utility adds a layer: you're not just anchored to the first number, you're also evaluating the fairness of the final price relative to the dealer's costs. If you think they have high overhead, you might accept a higher price as fair. Luna: So the same psychological mechanism — transaction utility — explains both the soda at the minibar and the car negotiation. It's a pretty fundamental lens. Lucas: It really is. And it's one of those concepts that, once you see it, you start noticing it everywhere. The way airlines price seats, the way software companies set tiered subscriptions — it's all about managing your reference price and your perception of fairness. Luna: I want to circle back to that 30% number from the study. That's a huge premium just based on perceived costs. How do retailers signal high costs to justify higher prices? Lucas: Lots of ways. Ambiance, service quality, brand reputation. A luxury hotel has marble floors and uniformed staff — that signals high costs, so a $10 bottle of water seems reasonable. A convenience store has fluorescent lights and linoleum — low costs, so a $2 water feels overpriced. Luna: But what if the product is exactly the same? The water is the same brand. The only difference is the environment. Lucas: And that's the genius of transaction utility. The environment changes your reference price and your fairness judgment. So you willingly pay more, not because you're forced to, but because it feels right in that context. Luna: It's almost like we have different 'pricing lenses' for different situations. And marketers are experts at putting the right lens on us. Lucas: That's a great way to put it. And once you know the lens is there, you can choose whether to look through it or take it off. Luna: Speaking of taking off lenses — if walking through the economy with us has made something click, we'd love it if you considered supporting the show. It keeps us ad-free and focused on the ideas, not the sponsors. Lucas: Yeah, listener support is what makes this possible. If you've gotten value from episodes like this one, you can find us at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the conversation going. Luna: And back to the economics — I think the real power of transaction utility is that it explains why we don't always act like rational maximizers. We care about fairness and reference points, not just absolute value. Lucas: Exactly. And that's why behavioral economics matters. It gives us a richer model of how people actually think, not how a textbook says they should think. Transaction utility is just one piece, but it's a big one. Luna: So next time you're at a hotel and eyeing that minibar, you'll know exactly what's going on in your brain. Lucas: And maybe you'll still buy it — but at least you'll know you're paying for context, not just soda.