Interesting Results

Consumer Perceptions of Prices and Profits

It’s no secret that consumers often believe that prices are too high and that companies’ profits are too large; however, a 2003 study¹ suggests that this is due, at least in part, to inaccurate perceptions about costs, prices, and profits. The results showed that:

Consumers greatly over-estimate company profits. For example, the profits earned by grocery stores was estimated by participants in one experiment to be 27.5% yet, as the authors point out, grocery store profits are typically in the 1–2% range.
Consumers underestimate the effect of inflation even when they are given inflation rates, current prices, and historical data.
When different stores sell the same items for different prices, consumers tend to assume that the store with the higher price is making a larger profit rather than considering the possibility that it could have higher costs (due to its location, volume, services provided, etc.).
When estimating how much profit a company is making or what is a fair price, consumers ignore many costs. When they are reminded of these costs, fair price estimates increase and profit estimates decrease, but consumers still overestimate the amount of profit companies earn.

¹ Bolton, Lisa E, Luk Warlop, and Joseph W. Alba (2003), “Consumer Perceptions of Price (Un)Fairness”, Journal of Consumer Research, 29(4), 474-491.