Priceless

Prices are relative – we can’t estimate them without a reference point.

What should a jar of peanut butter cost? Maybe you know because you often buy it. But what about a pearl oyster? You probably have no idea.

Although we’re sensitive to price differences, we aren’t always able to estimate an item’s fixed price, or its absolute monetary value. But are the prices we see in a supermarket fixed? If they were, you’d be happy to pay $10 for a bottle of red wine from one vineyard, no matter what a similar bottle of red wine from the vineyard next door costs. As you know, it simply doesn’t work that way. Why? Because prices are relative – they depend on each other.

Here’s a question for you: Would you be able to guess the exact weight of an object just by holding it in your hand? What about if you held a lighter object that you knew the weight of first? People find the second task much easier, as psychologists have known since the 1800s.

It’s just the same for prices: Consumers can say which product should cost more, but can’t estimate what a product should cost without a reference point. For example, if before an auction you asked bidders what their top bid would be, most of them wouldn’t know for sure. Why? Because it depends on the first bid, and how much others are willing to pay.

If you aren’t an auction bidder but just a regular consumer of supermarket peanut butter instead, you’ll have a better chance at estimating how much you’d pay for a jar. By buying the product frequently, you’ll learn and remember the average price. But could you remember the price of a jar of sun-dried tomatoes you bought for a dinner party last year? Perhaps not! Our memories of prices are limited, and it’s nearly impossible to remember all the prices you see in the supermarket.