I’m a big fan of iced teas and drink lots of them throughout my day. I enjoy the healthier and organic variants so today I decided to try Honest Tea (the Peach Flavor).

First of all, the tea is quite good. It’s not too sweet (which is consistent with their mantra: “Just a Tad Sweet,” and has a nice crispness to it. What stood out, however, was some information about the antioxidants present in the tea.

Here’s the entire label (click for the full size):

What I’d like to highlight is the main part of their label:

Specifically, I’d like you to focus on the bar that I’ve circles below:

What the hell does that bar represent? It looks like a loading bar for a website! I’m sure it’s supposed to indicate how much EGCG (SuperAnioxidant) is in the bottle (150mg apparently), but come on? It’s just a bar that is about 3/4 full. I realize that they are trying to make the information seem more scientific, but this is just kind of whacky!

Often in economics (and certainly in marketing) researchers ask consumers their willingness to pay (WTP) for an item. This can be done following an experimental manipulation to assess the impact of some variable or simply to determine how to price an item. I often use such a question in my own research and generally don’t think much of it.

Recently, however, I had an experience which makes me question the degree to which people truly know how much they are willing to pay for anything. I was bidding for an item on eBay and, being the behavioral scientist that I am, thought about what I should set as my maximum bidding price (I’m far too lazy to snipe). I knew that the item was selling for about $60 in other auctions so I quickly anchored on that value and bid about the same.

Unfortunately, a few hours later I was outbid. At this point, I started asking myself: “well am I really only willing to pay $60 for this item? What about $70?” And the truth was that I had absolutely no clue what I valued this item. From a purely economic point of view, I didn’t know how much utility I would extract from using the item. Would the marginal in crease in cost be offset by the utility I would derive?

There already is a tremendous amount of research on context effects in judgments (i.e. our subjective enjoyment/utility is highly variable and influenced by the environment that we are in), but to what degree is the uncertainty of willingness to pay understood? In auctions we know that people get attached to their item they are bidding on (i.e. endowment effect) and bid more than they should. But this applies a normative standard on how much they “should” bid.

First, I’m suggesting that people have a range that they might be willing to pay for an item rather than an absolute number. This is nothing new of course since we know that variance exists in people’s responses to just about everything. But if we stop here we would say that if we wanted to assess someone’s WTP by using a stepwise elicitation procedure where we ask a person if they would be willing to pay $1, $2, $3, etc… for an item and that would yield a maximum WTP.

However, I think that there’s more to the story. Even after a person has given his/her maximum WTP using this procedure (or any other) they still are uncertain about the utility they will derive from an item and so might adjust up or down based on some contextual cues (endowment in my auction example). If this is true, then price setting is as much of an art form as it is a science.

And please, don’t start on the supply/demand arguments as that will only make me whip out a list of ~500 papers that show how poor the demand side (people) is at figuring out anything.

So what do you think? Do people know what they are willing to pay for items?

Recently I needed to buy a large volume of M&Ms (for research…don’t ask). So I go to my local grocery store and see two different sized packages of plain M&Ms:

1. Small Size (9.4 oz) for $3.19
2. Medium Size (14 oz) for $4.99

(And no, they didn’t have the large size and there was no sale).

Something about those prices didn’t quite seem right. I know that I should get a volume discount when I purchase the larger size, but the numbers seemed off. So I whipped out my trusty cell-phone calculator and did the math.

It turns out that the M&Ms in the small bag cost $0.33936 per ounce, but M&Ms in the medium bag cost $0.35642 per ounce! So I was, in fact, losing out by buying the larger bag! Granted, we’re not talking about a lot of money here, but this is ridiculous. Consumers expect to receive a volume discount and yet here is a perfect example of the opposite, a volume surcharge!

And of course, I doubt many consumers would waste the energy to do the calculation meaning that Mars and the grocery store are pocking extra cash by taking advantage of people’s trust. I am not a fan of this!

So what gives?

I don’t remember the last time I clicked on a banner ad…and then I log into Facebook to find this one staring me in the face.

I’ve done some advertising on Facebook before, and this is, by far, the smartest use of the their keyword targeting feature that I’ve seen. In my music preferences I list Mika (who are fantastic, by the way) and clearly this artist thinks that he sounds something like them. So what does he do? He advertises to Mika fans directly. Brilliant.

The best part is that there are only about 55,000 users on Facebook who list Mika in their favorites, which means that the targeting is quite narrow. Exactly what you want in the online marina.

Well done Nathan Leigh Jones. Oh, and his music is okay…not my favorite, but not terrible.

My sister in law sent me this cartoon (click on it to see the full size version ).