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Pricing and human behavior modification

February 28, 2014 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

A recent study cited in The Australian suggests that charging fees for road usage would not only improve traffic flow, it would improve labor productivity. This raises a couple of questions:

• Is pricing an effective tool for modifying human behavior?
• If so, should it be a part of public policy?

Decades ago, Alfred Kahn, noted economist, said that basing landing fees on the size of the aircraft led to an inefficient use of runways at major airports. He believed that lower fees for recreational aircraft created inefficiencies and delays suffered by airlines and their customers.

When viewed from the standpoint of the control tower, strain on air traffic controllers as well as other support personnel, his point was well made. Wear and tear on the runway itself is another matter, but, I suspect, a much smaller cost than the labor component.

Professor Kahn's position was that if the landing fees paid by small aircraft were comparable to those paid by commercial carriers, the smaller aircraft would opt for local airports more suited to their needs and, in the process, alleviate some of the strain on major airport facilities.

Pricing and human behavior

That brings us to our first question: Is pricing an effective tool for modifying human behavior? The short answer is yes. As prices go up, people evaluate the value they're getting against the value of alternatives available to them.

Similarly, studies done by social psychologists show that positioning your highest priced offering first yields higher average ticket prices even when buyers don't choose your highest priced item. Why? Two reasons:

• Buyers are concerned that the lowest-priced alternative lacks the quality, service, dependability or a myriad other features they desire.
• As buyers, once we see the ideal, we hate giving things up. So when the salesperson says "This will fit your budget, what you're giving up is..." It forces buyers to consciously evaluate what is important to them.

Pricing is what allows us, as sellers, to quickly discern what customers value and what is unimportant to them.

Public policy

Should pricing be used as a part of public policy? Before I answer that question, let's take another look at the road use question posed in the Australian study.

A few years ago I saw a report that stated that adding more lanes to existing highways does NOT lessen traffic congestion. Why? Because people using public transportation mistakenly believed that they could shorten their commute by driving. Their reentry onto the highways fills the lanes added and, at best, has zero effect on traffic congestion.

Highway/road usage has dropped since gasoline prices have been allowed to rise in recent years. Another solid indication that pricing does alter human behavior.

If we're truly interested in efficient energy use, in reducing the stress on our aging highway systems, in lightening the burden of maintenance costs for bridges and highways for future generations, then pricing is one tool that can and should be used to accomplish those goals.

Having said that I don't believe that allowing politicians to set prices is the answer. As we've seen all too often in recent years, personal agendas and moneyed interest groups hold too great a sway over politicians to turn the reins of pricing over to them. So while I applaud the thought process behind the Australian study, I find it difficult to support public policy directed pricing.

If you need further evidence of the folly of "government-directed" pricing, you need look no further than recent subprime debacle in which the Federal Reserve kept interest rates artificially low to enable a greater percentage of the populous to become homeowners — whether they could afford it or not.

While the marketplace is far from perfect, it is typically yields better results than central planning — just a thought for our friends down under.

About Dale Furtwengler

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