Gas Prices and Irrational Consumer Expectations

Alix Spiegel reports on the factors that influence how consumers feel about the prices they pay for goods. With the price of gas so high, are consumers really irrational when it comes to cost — especially when a cup of coffee can cost $3 or more?

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ALEX CHADWICK, host:

There's plenty of public outrage about the high gas prices. But when you adjust for inflation, we're actually not paying more at the pump than we have at some times in the past. So why are consumers so angry? NPR's Alix Spiegel reports.

ALIX SPIEGEL reporting:

If you look at it in a certain way, consumers are completely irrational. Consider this example: A couple years ago the CEO of Coca Cola announced his company was working on a vending machine that would raise the price of Coke on hot days. Like any good businessman, he wanted to take advantage of increase in demand, but the news created an uproar. There were angry letters, late night jokes on Jay Leno, and, in the end, the guy lost his job.

The core of the issue seemed to be that it was wrong for a company to charge different prices for the exact same good, but as economist Richard Thaler(ph) points out, this wasn't the first time that an industry decided to charge different amounts for the exact same thing.

Mr. RICHARD THALER (Economist, University of Chicago): The airlines are probably the most sophisticated at adopting lots of different ways of charging different people very different prices for identical services. And consumers have gotten used to it.

SPIEGEL: So why do consumers accept discriminatory pricing from airlines, but not beverage companies? Why are they mad about paying $3 for a gallon of gas, when they pay at least that amount for a cup of coffee?

If you want answers to these questions, it's wise to consult someone practiced in consumer psychology. Someone like THALER from the University of Chicago, who patiently explains one of the central tenets of the discipline: how a consumer feels about paying a certain price has relatively little to do with the actual value of that good to the customer.

Mr. THALER: It's not so much what you're getting for it, it's whether I think I got a good deal. And that's the emotional part and the other part isn't so important.

SPIEGEL: Let me repeat that because it's not entirely rational. Thaler is saying that the actual value of a good is often less important to consumers than the way the transaction to procure that good went down.

Consider this example from consumer psychologist, Donald Lichtenstein, of the University of Colorado.

Professor DONALD LICHTENSTEIN (Professor of Marketing, University of Colorado): A wife comes home with a punch bowl, and she's all excited. She says, I got this $49 punch bowl for $19. I'm so excited.

The spouse, the husband, says, we'll never use it. We never have a party.

And she goes, yeah, but it's such a great deal.

SPIEGEL: The husband is looking at the absolute value of the good. The wife, the transaction. So if, as research indicates, consumer satisfaction has more to do with the transaction than the real value of the good, how do customers decide whether a transaction is fair?

According to consumer psychologists, there are a handful of predictable reference points consumers use: what they usually pay for the product, how much competitors are charging. But when prices become unusually high, like gas prices are now, consumers begin to look for, what Lichtenstein calls, attributions.

Prof. LICHTENSTEIN: When people see this big price difference we're paying over what we paid in the past, it naturally sends them into making attributions. Why is this the way it is?

SPIEGEL: And, as Lichtenstein points out, in the current situation, the explanation that's getting the most air time isn't something liable to cool public anger.

Prof. LICHTENSTEIN: The politicians are saying, you know, we're going to look into price gouging, price gouging, price gouging. It's a very affect-ladened term, price gouging. And so they have their ready-made attribution right now. It's not fair.

SPIEGEL: In fact, according to Lichtenstein, research shows consumers usually favor explanations that blame others.

Prof. LICHTENSTEIN: There's a bias to make self-serving attributions. Okay, for example, these gas prices are really hurting me.

Well, whose fault is that?

Well, I could have purchased a more energy efficient automobile, couldn't I?

SPIEGEL: Gas is one of those products, which has a clear absolute value. It allows us to get to work, it heats our homes, and as Richard Thaler points out, there's an entire group of people who feel that, given the environmental cost, the price of oil isn't unreasonable enough.

Mr. THALER: Most economists think that the price of gasoline is too low, that four or five dollars a gallon would give people all the right incentives. Maybe consumers should direct their anger at economists. Blame us.

SPIEGEL: Alix Spiegel, NPR News. Washington.

CHADWICK: Yeah, just don't blame us. We're DAY TO DAY from NPR News.

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