How useless information makes great deals

Everything at is marked down from some higher price. But is that marked down price a good deal? In a Washington Post article by Michael Rosenwald, behavioral economists note that we have a tough time knowing how to value the utility we will get from most of the stuff we buy. We struggle to figure out the real “value to me” of an iPhone or movie.

Retailers like us to think the value of a deal is measured by the difference between the “original price” and the “current price”. Instead, we should look at the difference between the “value to me” and the “current price”.

Given this difficulty we have setting prices, its hard to believe a perfect exists. Or if it does exist, its based on imperfect prices.

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  • Zach Clayton

    Interesting post. Retailers can never know the optimal price for an individual. Rather they can demonstrate to the individual that they provide the optimal price in the market (the lowest price for an identical good sold somewhere else). So “marking down” a price signals, they are a leader on the supply side. The consumer has to figure out the demand side on their own. Demand-aligned products or services (like Priceline’s “name your price” function) are rare.