Wednesday, February 15, 2006

Why do we enjoy things?

Seen (or a close approximation to) in a New York cafe (along with the actual Chelsea Clinton):
"We've raised prices 10%, we hope this won't affect your enjoyment of the cafe."
The straight neo-classical view is that this sentence is non-sensical: I'm eating the same cake so I'll derive the same amount of utility from it, whatever the price. A piece of cake is a piece of cake and its utility is constant. The only difference a change in price will make is that I'll go to the cafe less, or order less stuff while I'm there; my budget constraint has shifted inwards, but the utility from a fixed kind of cake remains constant.

Everyone I've given this reasoning to has violently disagreed: a $4 piece of cake identical in all other respects to a $4.40 piece of cake does not taste the same. Not only will you consume less cake over time, but your enjoyment of a given piece of cake will be decreased. People either take this as a general indictment of my attempts at economic cleverness, or else as a reason to embrace a "behavioralist" interpretation of the feeling. But what mechanism does the latter imply (for my cleverness is unimpeachable)?

One way to think about the experience of eating the cake is in a Stiglitz-like way: a consequence of the dependence of quality on prices (following the title of his 1987 JEL article). Price is a signal of quality and not scarcity. By paying more, you expect a higher quality piece of cake. Because your expectations are not met and it is a $4 quality piece of cake -- and not a $4.40 quality piece of cake -- you are disappointed. Your expecations are not met and so the utility from eating that cake is less if you have to pay more.

The other proposed mechanism is that somehow you feel cheated, ripped off, or taken advantage of. I cannot, however, articulate a coherent argument for that position (given that you aren't obliged to go to the coffee shop and purchase cake).

So I come to the quite banal point that our enjoyment of an event is quite dependent on our expectations of our enjoyment of that event (or, to put it in statistics talk, our prior matters).


Blogger henry said...

On the other hand, perhaps price is a signal about quality and the consumer *can't* make an ex post judgement about the quality of the item. What if they instead said, "We've raised prices 10% because we are using higher quality ingredients." People might buy *more* cake because a higher price signals a higher quality of cake. On the other hand, this may only work for larger differences in price. A $200 bottle of wine tastes as good to me as a $100 bottle; at that level I don't have any clue.

Or maybe psychological enjoyment somehow relates to a measure of lifetime utility: you feel the pain of less cake in the future now.

9:33 AM  
Blogger Isaac said...

Well, the cafe was quite explicit that they've raised prices 'cause rent has gone up...I sort of see that other story though, but when demand increases 'cause price goes up you've just done very goofy things to the law of demand...

11:35 AM  

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