When Memory Serves
Skip to content
Podcast | Insight Unpacked Season 1: Extraordinary Brands and How to Build Them
Marketing Strategy Economics Oct 1, 2011

When Memory Serves

Customers better remember low prices

Based on the research of

Yuxin Chen

Ganesh Iyer

Amit Pazgal

If you want to get the very best deal on an item when shopping, you had better make a note of the prices at each store or online site. However, if all you want is a reasonably good deal, you can put your notepad or tablet aside. New research by Yuxin Chen, a professor of marketing at the Kellogg School of Management, shows that firms in a price war know the limitations of human memory and set their prices accordingly.

Add Insight
to your inbox.

Previous research has established that when people go shopping they often cannot recall exact prices. For example, if the price of a toaster is $12.95 or $10.99, customers simply remember that the price is low. Chen and colleagues used a mathematical model to examine how this limitation of human memory affects price competition between firms. They focused their model on a single attribute of memory: how the categorization of available information affects the ability to recall facts that are pertinent to deciding whether to purchase an item from a specific seller.

Grouping Prices into Categories

Most shoppers, aware of their memory limitations, mentally lump prices into categories, such as “too expensive,” “a bargain,” or “priced reasonably.” Chen worked with Ganesh Iyer, a professor at the University of California, Berkeley, and Amit Pazgal, an associate professor at Rice University in Houston, to incorporate information from disciplines such as psychology and computer science in order to model the capacity to remember pricing information. “In computer science, memory is organized in terms of bytes,” Chen notes. “If you have one byte of memory in a computer, that means that you can recall either information of zero or one. Applying that to our research, that means you could recall a high price or low price. A person with a better memory can remember more categories of information, but generally human memory is limited and we may only remember a high price or low price.”

Chen’s team studied two kinds of categorization processes that shoppers use: symmetric and asymmetric. When people use symmetric categorization, they evaluate not only the posted price offered by the competing firms but also numerous other details that are relevant to the full price. They then compare only the categories that prices from both firms fall into. In asymmetric categorization, shoppers compare the recalled price of one firm with the actual price of another. The researchers modeled companies’ behavior when competing for three types of customers: those who do not compare prices; those who do compare prices, but do not perfectly recall the pricing information; and those who compare prices and remember them.

Best Memory Is for Lower Prices

During both symmetric and asymmetric categorization, Chen and colleagues found, shoppers are unlikely to remember exact high prices. Instead, shoppers use their available memory to store specific low prices. Their desire to get a good deal provides the incentive to put their effort into remembering the lower prices.

Shoppers’ inclination to remember lower prices gives firms an incentive to charge more favorable prices.

“We show that if there is a range of possible prices from $1 to $10, then you would allocate more of your memory to the low end, say $1 to $5,” Chen says. “You might remember that the item was $2 at one store and $3 at another store, but from $5 to $10, you would only remember it was about $5, not the exact price.” He comments that the finding is reasonable: “If the price of an item is high, you are less likely to buy it, so why should you go to the bother of remembering the price?”

Shoppers’ inclination to remember lower prices gives firms an incentive to charge more favorable prices, the researchers found. In the model, even small initial improvements in consumers’ memory for prices quickly moved market outcomes toward what they would have been if consumers had perfect recall of prices. When the number of categories was increased by only a few, the result converged to equilibrium pricing choices under perfect memory. There was thus a suggestion in the model that market competition adjusts to the memory limitations of consumers.

“Let’s say you go to a shopping mall, park your car at one end, and go to the store and check out a price,” Chen says. “By the time you get to the other end you don’t remember the price from the first store. You just remember if the price was good or bad, high or low. People get overloaded with information. The companies notice and they react rationally to this information—they set their pricing strategies accordingly.”

According to Chen, previous descriptive studies showed that people do not remember pricing information precisely. Those studies led corporate decision-makers to believe that they had to find ways to remind customers of exact prices. But the new findings call that assumption into question. “Our research shows that another way to help people is to encourage competition in the marketplace and let market forces compensate. Trying to remind people of the precise price can just result in overload,” Chen says.

Chen says his is the first paper to show that market competition mitigates the negative effects of consumers’ imperfect memories. “The market is very powerful—the computing power of the marketplace and the communication within the marketplace is very powerful. It compensates for the limitations of individual humans. If you feel like you don’t really remember pricing information, don’t worry too much about that. Companies already realize that and compensate for that, so you’re not really going to lose too much even though you can’t exactly remember prices.”

Related reading on Kellogg Insight

Consumers, Cars, and Common Sense: The role of gas prices in American automobile purchases

A (Sales) Taxing Proposition: How Internet sales taxes affect customer behavior

Featured Faculty

Member of the Department of Marketing faculty from 2009 to 2013

About the Writer
Beverly A. Caley, JD is an independent writer based in Corvallis, Ore. who concentrates on business, legal, and science topics.
About the Research

Chen, Yuxin, Ganesh Iyer, and Amit Pazgal. 2010. “Limited Memory, Categorization, and Competition.” Marketing Science. 29(4): 650–670.

Read the original

Most Popular This Week
  1. Your Team Doesn’t Need You to Be the Hero
    Too many leaders instinctively try to fix a crisis themselves. A U.S. Army colonel explains how to curb this tendency in yourself and allow your teams to flourish.
    person with red cape trying to put out fire while firefighters stand by.
  2. What Triggers a Career Hot Streak?
    New research reveals a recipe for success.
    Collage of sculptor's work culminating in Artist of the Year recognition
  3. What’s the Secret to Successful Innovation?
    Hint: it’s not the product itself.
    standing woman speaking with man seated on stool
  4. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  5. How Much Do Campaign Ads Matter?
    Tone is key, according to new research, which found that a change in TV ad strategy could have altered the results of the 2000 presidential election.
    Political advertisements on television next to polling place
  6. What Went Wrong with FTX—and What’s Next for Crypto?
    One key issue will be introducing regulation without strangling innovation, a fintech expert explains.
    stock trader surrounded by computer monitors
  7. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  8. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  9. How Experts Make Complex Decisions
    By studying 200 million chess moves, researchers shed light on what gives players an advantage—and what trips them up.
    two people playing chess
  10. Yes, Consumers Care if Your Product Is Ethical
    New research shows that morality matters—but it’s in the eye of the beholder.
    woman chooses organic lettuce in grocery
  11. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  12. Product Q&A Forums Hold a Lot of Promise. Here’s How to Make Them Work.
    The key to these online communities, where users can ask and answer questions, is how many questions get useful answers.
    man sits at computer reading Q&A forum
  13. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  14. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  15. What the New Climate Bill Means for the U.S.—and the World
    The Inflation Reduction Act won’t reverse inflation or halt climate change, but it's still a big deal.
    energy bill with solar panels wind turbines and pipelines
  16. Post-War Reconstruction Is a Good Investment
    Ukraine’s European neighbors will need to make a major financial commitment to help rebuild its economy after the war. Fortunately, as the legacy of the post–World War II Marshall Plan shows, investing in Ukraine's future will also serve Europe's own long-term interests.
    two people look out over a city
  17. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  18. The Political Divide in America Goes Beyond Polarization and Tribalism
    These days, political identity functions a lot like religious identity.
    people engage in conflict with swords
More in Marketing