Price anchoring

There is a really good article on price anchoring and the iPhone in the Washington Post today.

When the new iPhone was launched the retail price was around $599 - pretty stiff for a new mobile phone - but a deliberate tactic not just to skim revenues from early adopters (who tend to be insensitive anyway to the price) but also to anchor in the minds of consumers that this is a premium product at the cutting edge of design that you will have to pay a high price pay. Then the discounting starts, and because the initial price was high and was anchored in people’s minds, a discount looks really attractive perhaps blinding people to the higher costs linked to entering a 12 month or an 18 month contract with the mobile service provider selling the iPhones.

Dan Ariely is quoted as saying

“It establishes a reference price of $600, and now when it comes down, we compare it to the higher price. I don’t know if Steve Jobs planned this or not, but if he manipulated based on anchoring, he did a very nice trick.”

“You get the iPhone, and you get the deal,” said Richard Thaler, a University of Chicago economist who came up with the notion of transaction utility, which he has described as “the difference between the amount paid and the ‘reference price’ for the good, that is, the regular price that the consumer expects to pay for this product.”

The rest of the article is here

Note: Dan’s book “Predictably Irrational” has been flying off the shelves of my local bookstore ... it seems to be one of the books of choice among my students this summer.