Reference: Dan Ariely: 2008 experiment with 'painkillers'. Half of the participants were told that the painkillers cost $2.50 a dose, half were told they cost 10 cents. All received placebos. 85% of the participants taking the expensive pill said they experienced less pain, compared to 61% taking the cheaper version.
Insight: People tend to have an ingrained belief that expensive products are higher quality.
Insight: Since price signals quality, brands should invest disproportionately towards higher end goods.
Insight: Low prices damage our expectation of product quality. Dropping the price to improve market share might work in the short term, but will likely damage long term demand.
Insight: Veblen goods are an example of spending designed to enhance status.
Insight: Veblen goods are desired because they are widely known to be expensive - they function as an advertisement for wealth.
Insight: The appeal of Veblen goods is that higher prices mean they are more exclusive. A fall in price might lead to a fall in demand.
Insight: Prices of goods sought by the wealthy force up all prices, meaning people have to work harder to 'keep up with the Joneses'.
Reference: Thorstein Veblen - American theorist of conspicuous consumption.
Definition: Goods that increase in demand as price goes up.
Example: Caviar.
Insight: The same ideas that arise from sexual selection theory such as signaling explain Veblen Goods.
Key Insights & Principles
Business & Marketing
With particular types of goods, such as luxury goods and pharmaceuticals, the demand can increase with price.
Humans tend to associate higher price with higher quality, and low price with low quality.
Spending money is a way to signal wealth or status, and the appeal of Veblen goods is the high price which means exclusivity.
Invest in and market higher end goods.
Avoid dropping prices to improve long term market share.
