Wrinkly pricing

Today amazon.com announced that it had switched from Google to Microsoft as the provider of search engine technology for its own A9 search engine. I hadn’t thought much about A9 so I thought I’d check it out.

Well I had always known that A9 allowed searches inside books. But this also allows classified searches in many places including reference sources, Wikipedia, blogs and of course the web in general. All that is fine but nothing special.

What was interesting was the deal: sign up to A9 and you receive 1.57% off pretty much everything at amazon.com. The idea for the discount is to get you searching tehre and presumably to sell targetted products. But why the 1.57%?

Well, it turns out that 1.57% is just rounding and what they would like to give you is 1.57142857142857142857 … % or (22/14)% discounts; that is, pi/2. So amazon.com are saying, “search with us and get just less than pi/2% off all products.” Actually, they don’t say that you get just less so there curent offer is somewhat misleading. But hey if you trying to get “wrinkly” about pricing then at least you should be mathematically accurate!

All this reminds me of primary school when we had to draw maps of Australia. The teachers were always saying “make the coast wrinkly.” The idea is that our maps would be more realistic. In the end, there were alot more bays, harbours, inlets and fjords than really was the case.

Amazon.com are going for “wrinkly” pricing against all convention and all ability for mental computation. But I guess they will end up attracting the seriously price conscious customers that way.

Driving hard bargains

From Nature, so you know its a contribution to knowledge, a story about research at the University of Leuven who have examined the behaviour of men playing the ultimatum game.

This game is a simple one where one person makes a take-it-or-leave-it offer to another over how to split an amount of money. Either the other person accepts the deal or they do not. In the latter case, no one gets any money. Game theory predicts that the offeror will ask for (almost) all the money and the offeree will accept this because it is better to get something rather than nothing.

In experiments, this outcome does not occur and usually offerors offer something fairer (40 or 50 percent) and offerees reject things that are unfair. The new research looks at the behaviour of men playing this game factoring in their testosterone levels. It turns out that the higher the testosterone the more likely offerors will make high demands and the more likely offerees will only accept fair offers. Thus, pit two high testosterone individuals together and a deal isn’t likely.

But then the researchers did something else. They showed the subjects pictures of bikini-clad women. This didn’t affect the low testosterone subjects’ behaviour but did soften the stance of high testosterone ones. The suggestion is that advertisements depicting women with little clothing will get some men to pay higher prices. This is a longer bow to draw. Indeed, there is a sense that we already knew this. My consumer behaviour colleague, Brian Gibbs, demonstrated that ads with such pictures were much more effective (on men and on women) than those without them.

Confusion as a screening device

In Slate, Tim Harford recounts his difficulties in choosing a mobile phone plan. Faced with a confusing set of options, he finally rings his current provider and they tell him what the best plan for him is. His thought: they put too many options in their catalog so as to screen customers based on whether they have time to call them for the ‘right’ choice or not.

The question is whether this argument makes sense. One issue is whether calling-in is the option that costs the most in time. Harford’s implicit idea is that those who do not have the time will randomly choose a plan and end up paying too much. Those who do, will call-in and pay less. In that way, the phone company screens for those who have “money to burn.”

This theory, however, depends on several things. First, that those who do not call-in indeed have money to burn. It seems to me that if you wanted to exploit this, you would want to provide a simple but high price option that can be purchased easily rather than an array of choices that are hard to sort out. Second, even if this were the case, it would have to be actually harder to call-in rather than choose a plan from a catalog. The reverse could easily be the case. Finally, those who were frugal would have to understand and trust the calling-in option.

On this latter point, my own experience with choosing gas and electricity plans stands in sharp contrast. In preparing for a presentation at an ACCC conference last year, I decided to see how much competition amongst energy retailers had got us. I rang up all the main incumbents (including my own provider) and tried to compare the plans. The task was incredibly difficult. Some plans were based on monthly consumption, others bi-monthly. Some had the prices stated ex. GST and others including GST. And there was more. I put it into a spreadsheet and what did I find? They were all exactly the same! Hours of work for nothing. They were all the same and at their regulated cap.

In the end, I rang my current provider and threatened to switch to an alternative. They offered me what amounted to a 2% discount for the next year — a saving of $22 in total. Not much reward for the effort of working out what to do. Moreover, that 2% was disappear next year as it was really just the X in the CPI-X regulated pricing formula.

I saved people at the conference the time of searching but also identified a real source of screening: those willing to call-in were those who had demonstrated a willingness to switch. These are exactly the people you want to give a discount to.

All this doesn’t explain the mobile phone confusopoly where the prices are different. Thinking more about that is something I’ll leave for a future blog.

It is all in your mind

Forbes this week contains an interesting article on the new field of neuroeconomics. Neuroeconomics involves economists using MRI scanners and the like to work out what ‘utility’ is really all about. Here is one example:

Traditional economics predicts that people should use money to acquire things that might make them happy. Money–in and of itself–shouldn’t make people happy. But Knutson found more primal forces at work. Offers of cash caused a surge of dopamine in a tiny piece of neural machinery called the nucleus accumbens–a structure as ancient as backbones that plays a key role in addiction. The surge wasn’t caused by a wad of cash already in people’s back pockets, but instead by the opportunity to make some easy money.

The article also reports examples on trust and on decision-making under uncertainty. Not that anyone should through away the textbooks yet but it is an interesting line of research.

On my wish list would be an examination of what causes people to reject take-it-or-leave-it offers that would leave them with less than should they accept them. This might give us an insight into the drivers of ‘fairness.’

(Thanks to MBS alumni, Joe Yap, for this reference)

Product differentiation by ignorance

Telstra’s Bigpond ISP launched its movie and TV download service yesterday. This is an interesting move given Telstra’s stake in Foxtel as it appears to provide a competing service.

According to today’s Australian Financial Review, the download service will be distinct from the cable TV service. Why? Well read this:

Families that insist on using their TVs to watch TV shows and movies would be able to do so -but only “if they can work out the black wire and the yellow wire and the red wire” to connect it to their PC, Telstra BigPond group managing director Justin Milne said.

Yes, go ahead and read that again, it did say what you thought it said. Only consumers with ‘wire colour knowledge’ will be able to freely substitute between content sources and watch that content on their TVs. Others who download will be confined to their PC. So no worries, no competition. After all, how many people have ‘wire content knowledge’?

Obviously, the more relevant question is how many people who have ‘work out Bigpond’s download service’ do not have ‘wire colour knowledge’? Remember ‘wire colour knowledge’ is roughly equivalent to ‘connect VCR to TV knowledge’ and my guess is those with the ‘CD tray is not a cup holder’ knowledge are ‘wire equipped.’ So basically most downloaders will have a nice free choice. Talk about “delusions of differentiation”!

Actually, I have a Mac Mini hooked up to our TV. I haven’t checked it out yet but there is a pretty good chance that the Bigpond digital rights management won’t work there. In that case, Telstra will have managed to exclude ‘sensible enough to use a Mac’ households from their service. But is that differentiation or indifference?