How Much Might a Beer Cost in a Fancy Resort? A Possible Replication of Thaler’s Well-Known Experiment

Abstract

This chapter starts with an experiment which was originally presented by Thaler in 1985. In the experiment, Thaler wanted to test the standard economic thinking whereby actors should pay for a product according to the utility that they get out of it. These utilities are based on stable preferences which are expressed in buyers’ reservation prices. He asked participants how much they would authorise a friend to pay to get them a beer whilst they stayed on the beach. Even though the beer bought by the friend would be the same regardless of where it was purchased, subjects who were told that the only nearby supplier was a fancy resort hotel were ready to pay significantly more and overpriced the product dramatically. In this study, this famous pricing experiment was retested on a sample population of Romanian and Hungarian students. Times have changed compared to the original American samples; in this case, the respondents are from Europe where subjects are used to their own domestic prices in their national currencies. Even so, our participants also highly overpriced the beer. Partly this was due to the situation—the hypothetical environment confused their decision; the different currencies at play were also partly responsible. It means that subjects’ preferences and expected reservation prices are not as stable as assumed by mainstream theory. This study aims not only to understand how everyday actors would price a beer on a hot summer’s day, but provides a deeper insight into the economic concept of “price”. The definition of price is sourced from mainstream economic assumptions, which move and motivate consumers’ decisions and market behaviours. From an economic viewpoint, various prices can be defined such as market price or reservation price. Here, the reference price is widely studied and compared with the reservation price. The paper starts and finishes with behavioural economics experiments as the main empirical research method; the current description of the subject matter and literature are reviewed afterwards. It suggests that the consumer surplus which relies on preferences is confused by various situations in the framework of behavioural economics, such as different environments or currencies.

Economics is a far richer field with more interesting, realistic, and detailed models than when I first entered the profession.

(Akerlof 2001)