Free Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

called “everyday low pricing,” but these experiments usually fail. ‡ Getting a great deal is more fun than saving a small and largely invisible amount on each item.
    Macy’s and JC Penney are just two U.S. retailers to have notably tried—and failed—to wean their customers off their addiction to frequent sales. In an image makeover undertaken in 2006–07, Macy’s leadership specifically targeted coupons as a price reduction device, and wanted to reduce their usage. Macy’s saw coupons as a threat, linking the brand too closely to less prestigious retailers such as JC Penney or Kohl’s. After taking over several other department store chains across the country and rebranding them all as Macy’s, they cut the use of coupons by 30% in the spring of 2007, compared to the prior spring. This did not go over well with customers. Sales plummeted, and Macy’s quickly promised to return to its previous glut of coupons by the holiday season of that same year.
    JC Penney similarly eschewed coupons for a brief period in 2012 in pursuit of an everyday low price strategy. Noting that less than 1% of revenues came from full-price transactions, CEO Ron Johnson in a surprisingly candid press release announced an end to what he dubbed “fake prices”—the mythical suggested retail price—and the start of a simpler pricing scheme. In addition to abolishing traditional sales via coupons, the new scheme did away with prices ending in .99, rounding them up to the nearest dollar. JC Penney claimed the end price consumers paid was effectively the same, after all these changes.
    It might well be true that consumers were not paying any more under the new regime, but they were missing out on lots of transaction utility. They even lost that tiny pleasure of paying just “under” a given dollar amount, e.g., $9.99 rather than $10. The experiment was a flop. JC Penney’s sales and stock price plummeted as the changes took effect in 2012. A year later, Johnson was ousted and coupons returned to JC Penney customers. But as of 2014, sales had not yet recovered. Maybe consumers did not like being told that the suggested retail prices, the source of so much transaction utility pleasure, were fake.
    Sharp readers (and shoppers) might wonder about large-format discount retailers such as Walmart and Costco. These retailers successfully operate under an everyday low pricing strategy, sometimes without explicit reference to an original higher price. But they have not eliminated transaction utility; just the opposite. They have convinced their customers that the entire shopping experience is an orgy of bargain hunting, and go out of their way to reinforce that image. Along with providing genuinely low prices, Walmart also offers a variation on the old ploy of guaranteeing that they have the lowest prices available by allowing shoppers to scan their receipts into a “savings catcher” app that promises to give a refund to anyone if there is a lower price available. Unless Macy’s and JC Penney wanted to give up all pretensions of offering an upscale shopping experience, they could not compete with these true low-cost providers in providing transaction utility to their customers.
    For consumers, there is nothing wrong with being on the lookout for a bargain. Saving money on one purchase makes another purchase possible. But we don’t want to get caught buying something we won’t use just because the deal is too good to pass up. For businesses, it is important to realize that everyone is interested in a good deal. Whether it is via sales or genuine low prices, the lure of a deal will attract customers. The parking lot at Costco, a warehouse-style retailer with a reputation for low prices, always has a large number of luxury automobiles. Even affluent consumers get a kick from transaction utility.
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    *    Perhaps surprisingly, the one group of people that come closest to thinking this way about opportunity costs is the poor.