Bargain!

Have you ever gone across town to get a bargain? Chances are you spent more on time and petrol than you saved. Have you ever wondered why?

Economists have an experiment they like to play. It’s called the ultimatum game. Here’s how it works.

There are two players. Player one gets an amount of money to divide up and has to offer an amount to the second player. Then the second player gets to make a decision. If they want, they can accept the offer. Or they can turn it down. If they turn it down, both players get nothing.

For example, the economists give me ten dollars, I offer you $5, you accept and we both go home happy.

Or:

They give me ten dollars and I offer you $2.  You refuse, and we both go home with nothing.  :(

Most of the time, the experiment is done only once. So if you turn down the money, you get nothing.

Economics predicts that people prefer something to nothing, but that’s not what the ultimatum game shows! Most of the time, if the offer is less than twenty percent of the total, player two would rather ‘punish’ player one than take the measly sum.

This experiment shock economists. It shows that humans have an inherent sense of fairness, and they will go out of their way to teach someone a lesson if they feel that person is being unfair.  The benefits of teaching that person to be more generous will presumably end up being shared by everyone.

This could be why getting a bargain feels good. You might suffer to obtain it, but the selfish retailer is suffering too! You are teaching them that high prices will only hurt them in the long run.  When you spend time and money driving past Coles to shop at Aldi it feels it like a selfless act.

This could even explain why we brag about bargains – in our reptile brain, seeking out a bargain feels like a community service.  It feels like we’re contributing to keeping prices down for everyone.

This is especially true of repeated interactions. If you are holidaying in a faraway place, you are unlikely to experience the benefits of punishing an expensive retailer, so you make a more immediately rational calculus.

Interestingly, the ultimatum game produces similar results across cultures. In nearly every society, player one tends to try to make a fair split, and player two rejects low ball offers.

The exception is in economics graduate students, in whom exposure to economic theory has produced a warped sense of morality. These players tend to meekly accept whatever they are offered. These are probably the same people who calculate how long it will take to get to the supermarket, and then proceed to do all their shopping at 7-11…

14 thoughts on “Bargain!

  1. I totally think there’s a moral judgement about paying too much for things. not only that you ruined it for everybody by paying the RRP, but that you’re wasting your life. I used to experience this when I didn’t have a car, and driving to the burbs to get a better deal was impossible. People are offended even when it’s not their money you trade with the retailer. People would look down on me for spending more, even though I didn’t have the massive overheads of running a car. It made me mad – I was keeping Woolworths afloat but not Shell, Vic Roads or AAMI. Now I have a car and I still shop at Woolworths. Suck on that!

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  2. I think people who drive further to Aldi do it because it saves them money. I think people seek bargains because it saves them money. And if it doesn’t save them money, they at least thought it would before they drove across town and, as an economist would say, sunk their costs.

    I like the implications of the ultimatum game, that people are rewarded for fairness, and I think it genuinely applies in some situations. But I think bargain hunting is classic neoclassical behaviour.

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  3. Yeah, whatever…
    The average car burns around about 10 litres of fuel for every 100km driven. So. I would call driving to Frankston in Victoria from Melbourne CBD , ‘going out of the way’. You will have driven pasts dozens of Coles supermarkets. Melbourne CBD to Frankston CBD takes about 45 mins and covers 56 km. Therefore you will burn about 6 litres of fuel – that currently costs AU$7.80. So if you save AU$10 in groceries you make it worthwhile and you’re up $2.20. Easy. I just can’t be bothered and tomatoes at Aldi taste like shit.

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  4. Refer to my previous post.
    A 24 pack of party pies at Aldi costs AU$3.99 that’s 16 cents per party pie. 16 Party pies at Coles costs AU$6.53, that is 41 cents per party pie.
    That means that per party pie, Coles costs 25 cents more than Aldi. That means that if you had 31 friends over for a party and they all eat 1 party pie, you should drive 56km and shop at Aldi to break even. (If you lived in Melbourne and Aldi was in Frankston)

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  5. Hey, great comments! thanks everyone.

    Dave – i think your decision not to drive to Aldi is rational. The time costs of driving 45 minutes to get to Aldi in Frankston needs to be taken into account. Most people don’t consider supermarket shopping recreation, so they would want to save that time or be adequately compensated for it.

    Bend your knees – I agree that standard economics explains the bargain hunting, but it doesn’t necessarily explain the boasting and pride that comes with it! Especially when so many other types of consumption are marked by a correlation between expenditure and social acceptability.

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  6. Pingback: Krugman – what’s wrong with economics « Thomas the Think Engine

  7. I think supermarket shopping is something people love to hate – it must be leisure for most people or they would outsource it and Coles online would be way more popular than it is.

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  8. I think the pride displayed by the successful bargain hunter is less about punishing the retailer and more about competing with the other monkeys in the cage. If monkey one is eating a tub of yogurt and monkey two has a cheaper yet equivalent dairy snack, monkey two will prove themself the cleverer monkey by saying how they saved their beans by snaffling up the red spot special. At some later point the beans not wasted on overpriced yoplait can be spent on some status item (eg. Dolce & Gabbana sunglasses) that will show monkey two to be totally superior to monkey one. However if monkey one got their Chanel sunglasses at the Myer stocktake sale then they will be even cleverer than monkey two and can use their excess beans to get a sick spoiler for their car, proving monkey two to be the fool. And so on.

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    • I liked your theory, even though i had a nagging suspicion you’re inferring me and my species are monkeys…

      I kind of agree with you, but given the bragging that goes with having a more expensive car, more expensive carpet, more expensive haircut, etc. it feels weird that there is then bragging that also goes with getting the more expensive car at the lowest possible price.

      And i think when you get a bargain, no one feels bad for you. (unless they already spent more on the same thing). UNlike if you buy a ferrari, where people kind of hate you (I imagine). Getting a bargain is generally a communally respected thing to have done.

      Maybe there’s two currents, one driving us to spend more, the other driving us to try to punish the rip-off retailers. The former boosts our status as alpha monkey, the second boosts our status as team monkey.

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  9. Hey, Lucky Aldi is everywhere and we don’t have to drive to Frankston. I love Aldi- I don’t want the cost of TV advertising built into my goods. Baked beans are baked beans whether you saw them on TV or not. Though, Dave, not all pies are created equal- just like tomatoes

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  10. Pingback: On Blogging « Thomas the Think Engine

  11. I’ve just discovered this so foregive me for reviving old post.

    My extended family live in HK and one thing I often find boring is the dinner table conversation usually revolves around prices – the price of a new mobile phone offer, the price of health insurance and so on.

    But consider this

    I would regard the HK economy as more technically efficient that the Australian one, and I used to think it was because the way production was organised – more efficient organisations and so on.

    But I now realise it is all this consumer information floating around, and a willingness to shop around and drive prices down. Oligopoly killing. The former HK Telecom, a ultility like Telstra, was renamed PCCW and had its profit and share price driven into the ground. Why? Because startups killed it. Offering better price and service.

    And why is Telstra (4 pillars bank, AMP, Qantas) etc still around in Australia.

    We are not quick enough to kill our oligopolies with their natural poison – competitive purchasing.

    So if everyone rushed down to Aldi and bought everything because it was cheaper, or rushed to Youi Insurance coz its cheap rather than RACV because they put emotional advertisements on the TV…then the oligopolists would learn very quickly that price matters – and industrial practices that keep prices high would disappear.

    So running a free market is all our responsibilities. I don’t think there is enough emphasis, especially from rightwingers who represent establishment interests, on a healthy free market.

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