The Hindu Business Line : <I>Pricing games </I>

Consider this. While you are shopping for your monthly groceries, you find that one kg of breakfast cereal costs Rs 150. The regular price of the cereal is Rs 125 but you bought it at Rs 110 sometime ago when the product was selling at a discount. You will obviously not buy the cereal now. A few days later, the price falls back to Rs 125. What do you do? Chances are that you will buy the product at that regular price. Why?

You were witness to a sudden rise in the product price. This increased the anchor price from Rs 100, when you last bought it, to Rs 125, the regular price. You, therefore, saw value in buying it at Rs 125.

Such pricing strategies are very common in the department stores in Canada. A primary reason is products do not have maximum retail price (MRP) as they do in India. This gives each store the right to tweak prices as they please and take advantage of consumer buying behaviour.

Notice the economics at play. Department stores increase the price one week only to reduce it the next week to make you feel that you are getting a bargain — the illusion of value.

The psychology is no different when you buy shares. Suppose a stock is currently trading at Rs 100. You prefer to wait and buy the stock at Rs 95. What if it instead moves to Rs 125? You kick yourself for missing the opportunity. If the price later declines to Rs 110-115, you may be tempted to buy it, even though you were unwilling to pay Rs 100 earlier. That is how rational we are in our decision making!

(The author is based in Toronto, Canada)

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