Do Consumers Perceive Precise Prices to be Lower Than Round Prices? Evidence from Laboratory and Market Data

We examine two questions: Does precision or roundedness of prices bias magnitude judgments? If so, do these biased judgments affect buyer behavior? In a laboratory pre-test, we find that people incorrectly judge precise prices (e.g., $325,425) to be lower than round prices of similar magnitudes (e.g., $325,000). Building on evidence of greater prevalence of precision in smaller numbers and roundedness in larger numbers (Dehaene and Mehler 1992), we suggest that representativeness of digit patterns might influence magnitude judgments. We term this the “precision heuristic ” in price magnitude judgments. We examine the effect of this precision heuristic on buyer’s willingness to pay (WTP) in two distinct but complementary ways. First, we conduct a laboratory study to understand the psychological mechanism behind the precision heuristic. We find that people do learn to associate precision with smaller magnitudes, and that this association biases their price magnitude judgments. Additionally, we rule out alternative explanations which posit that a precise price signals a seller’s low-price strategy or he