Aug. 18th, 2014

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One of the more perplexing/annoying things about moving to the US is that nothing actually costs its stated price. You go to a restaurant and you're obligated to add 10-25% extra as a tip. You go to the supermarket or one of the big chain stores and it's all about specials and coupons and joining their stupid club or getting their special credit card or whatever. And then there's the joke that's medical insurance, where procedures are billed at something like a 10x markup, if your insurance company covers it then you pay some kind of flat rate, and then the insurance company and the hospital have an agreement where they only pay the original price rather than the ridiculous marked-up price. Anyway, it recently occurred to me that all these different pricing schemes make for excellent case studies in incentives and anchoring.

Restaurants

At restaurants the price of the food is considerably less than the price you actually pay, thanks to tax and tipping. This makes sense because by the time you're paying you've already consumed the product and are committed to forking over money for it. You get lured in by artificially low prices, and then when it's too late to leave you get hit with extra charges. For bonus points, tipping isn't thought of as being part of the cost and so people still think of restaurants as being cheaper than they are.

Supermarkets/chain stores

At these places the situation is the opposite of restaurants - you get no use from the product until after you've left the store and you can put the product down and leave without paying anything at any time before you actually hand over the money, so there's no incentive to add extra costs in. Instead, they start with a high stated price and then add discounts through various means so that you get to feel clever and/or lucky for paying less.

Medical costs

I'm less sure about what's going on here, but I'm tentatively going to say that the high stated costs of medical procedures are intended as a disincentive to stop you from getting anything done that you don't need desperately enough. Or alternatively, they're intended as an incentive to get insurance since the average person doesn't even come close to being able to afford them, and I've heard rumours of hospitals and insurers colluding on this sort of thing. And then if your insurance covers the procedure then you get the same feeling as from the previous case, where you're lucky/clever for having gotten the insurance instead of having to pay those ridiculous bills yourself. Hospitals can also afford to have higher costs in general because unlike restaurants and fancy chain stores, when you need medical care you usually need it RIGHT NOW and don't have time or energy to quibble or shop around. Basically, you precommit to paying them before you have any idea what the price is, and so they're free to hike the price up as high as they want.

Relatedly, I'm now thinking that hospitals and big chain stores might contain the formalised vestiges of haggling culture, in the sense that in shops and countries where haggling is how commerce generally works, only foreigners and idiots pay the full price. Similarly, there's a sense that if you get hit with the full cost of a medical bill or you overpaid for a piece of clothing, it's because you didn't work the system properly, not because the price shouldn't have been that high in the first place.

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