If there are two indistinguishable products sold for different prices, we assume that humans will purchase the less expensive one. Although prima facie this maxim makes sense, I think there is a lot more to it. In theory, people prefer to consume products of a higher quality, but what happens when humans cannot differentiate between product A and product B, should we still buy the one advertised as being better?
Most digital music is in an audio format known as MP3. MP3 is a lossy data compression algorithm. This means that if a CD were to contain 1000 bits, the MP3 algorithm figures out which bits of information actually contain the music and cut out everything other than that. This allows for the software to reduce the file size of a song by over 1000% while keeping the fidelity of the audio near the same quality. The highest quality an MP3 can be is a 320kbps CBR file (which is only on average a 400% reduction in space compared to a lossless file) and is almost impossible to differentiate between the same song on a CD. This means, unless one is listening on an extremely high quality stereo, with all of the perfect equipment, the right type of music and intentionally trying to pick out the differences, one simply cannot tell the difference between an MP3 and the CD quality track. The debate between FLAC (the cd quality file ) and MP3 is a bit more nuanced, but the essential point remains. Despite not being able to tell a difference in the sound quality, many people are willing to pay more money for the lossless file than an MP3 simply because it makes them “feel better”.
No matter how silly “feeling better” sounds as a reason for spending more money, music fans are not alone. As every Torontonian knows, buying tickets to a Toronto Maple Leafs game is very expensive. While the Maple Leafs sell out every game with a median ticket price of over $450, the Toronto Marlies barely get 4000 people to their games with tickets at less than 1/10th the cost. Change the jerseys and a casual hockey fan would have no idea they are seeing “inferior” hockey, yet they are still hesitant to spend money on anything other than the Leafs.
There is a large amount of academic literature pointing out that the average person cannot differentiate between cheap and expensive wine and that cost is not correlated to quality, yet people still buy expensive wines. Studies are even worse for beer drinkers as not only does the same effect exist; people who habitually buy one brand of beer because of “taste”, would likely not be able to pick out their favourite drink out of a blind taste test.
With no discernable difference in quality, why do people buy more expensive products? The answer really is that it makes people feel better. Researchers at Caltech treated a group of participants to samples of wine while undergoing an MRI. Despite each sample coming from the same bottle of wine, the researchers told the participants that each sample cost a different amount ranging from $5 to $90. The more expensive they were told the wine cost, the better they thought it tasted. More surprisingly is that the researchers discovered that for every increase in the price of the wine, they found an increase in activity in people’s medial orbitofrontal cortex, one of the parts of the brain that experiences pleasure.
To see this effect in a different context, individuals with headaches were split into two groups and given placebos. Despite being given the exact same placebo, group A was told that their pill cost 10 cents while group B was told that their pill cost $2.50. The more expensive placebo was 40% more effective in alleviating headaches than the cheaper one.
If there are two indistinguishable products, the consumer will likely gain more pleasure from buying the more expensive one. If you’re selling a product, merely telling someone a product is better is often enough to actually make it better.
Although people like quality products, people like hype even more. I brought up sports before and I think it’s a good example to use again. In Canada, college hockey (CIS) is far superior to junior hockey (the CHL). Where I live in Kingston, Ontario, despite the fact that the Queen’s University hockey team would beat the Kingston Frontenacs (CHL team) mercilessly, the Frontenacs get far better attendance, more attention and higher revenues.
The United States has a similar situation. The LA D-Fenders of the NBA Development League have less than 400 fans at their home games while their cross-town neighbours, the UCLA Bruins college basketball team (which has horrendous attendance) receives more than ten times the amount of fans at higher ticket prices. Similar to the Queen’s hockey team, the D-Fenders are far superior to the UCLA team, but the quality of these teams is irrelevant. Canadian junior hockey and American college sports have the appeal of “star” players. That is, young players who could maybe… one day… possibly become a good player in professional sports. Having this “buzz” is enough to make the inferior product much more appealing to the superior product.
One of my friends recommended that I see the movie Fury, saying it was the best war movie they have ever seen. After seeing the movie and being disappointed, I asked them how they could possibly have enjoyed it more than Saving Private Ryan, only to find out that this person had not seen Saving Private Ryan. I understand that movies are subjective, but it seems peculiar that one would see a movie with mediocre reviews when there is a similar movie with a similar premise that has incredible reviews that they could see (note: this person did not see the movie in theatres so that is not a factor). The reason why this person had seen Fury before seeing Saving Private Ryan is not because anyone thinks Fury is a better movie (I sincerely doubt anyone thinks this), but because Fury had more excitement. Fury is new, it is exciting, it is being talked about – it has enough “buzz” to make up for its inferior quality. Realistically, this is same reason why anyone watches any new movie rather than methodically checking off every movie from the IMDB top250 on their list.