A price is evaluated against a remembered or contextual reference rather than in absolute terms, so the same price reads as cheap or dear depending on what preceded it.
Reference prices form from past prices paid, prices seen nearby and advertised comparisons, and they adapt. The commercial consequence is that discounting teaches the reference: a product repeatedly promoted establishes the promoted price as the reference and the list price as an imposition, which is why habitual discounting is hard to reverse.
In practice
- A brand that ran a sale every quarter for two years cannot sell at full price to anyone who noticed.
- A service whose price rises after a long freeze is resented more than one that rose annually to the same level.
- Standing
- Related to anchoring and to transaction utility, which describe the mechanism from the judgement side.
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys