Comments on “Psychophysics of Prices”

Abstract

In their recent JMR article [6] Kamen and Toman suggest that their observations are contradictory to Weber's Law. In fact, Weber's Law refers to the stable proportionality of the smallest difference in stimulus intensity perceptible to the individual, and since a difference is always perceptible, this law should not be expected to apply directly to consumers' reactions to changes. Economists have, however, developed two distinct propositions of some affinity to Weber's Law. The first suggests that the consumer's subjective scale has a logarithmic tendency and the second that curves of constant elasticity fitted to mass consumption data and average prices can be used to derive numerical estimates of demand elasticities. Such demand curves, however, can express only central tendencies of group behavior in the long run, whereas Weber's Law concerns individual reactions in the short run. Kamen and Toman do not seem to be aware of these distinctions or of the long-established fact that consumers' behavior can change abruptly when certain limits are approached [1, 2, 3, 4, 9]. The central concept of the theory of purchasing behavior in the short run is the buy-response curve [3, 4], which shows the percentage of customers for whom a given is neither too high nor too low. Our survey results strongly support the proposition that both the high and low limit distributions are log-normal and that the generic form of the buy-response curve is symmetrical if plotted against a logarithmic scale. A typical example of the buy-response curve is shown in the figure. The upper curve indicates percentages of potential purchasers and the lower curve is a histogram of prices paid for the last purchase of pork sausages by 1,518 housewives. (The irregularities of the buy-response curve are largely due to sampling fluctuations.) In the range immediately above the dominant there is a very sharp drop in the percentage of potential purchasers, and it is clear that if the of a brand is suddenly shifted o this region it will meet with high pric sensitivity. This short note cannot enlarge on the theory of the buy-response curve. It is well established and, supported by additional evidence, it has been extended further [7, 8]. The main point i that he logarithmic nature of the ubjective scale is characteristic of group attitude and thus ully compatible with the fair price theory. Kamen and Toman w re therefore not justified in considering the lat er to be contradictory to the relevant aspects of he principle of which Weber's Law is a special case.