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Customers shop at a Best Buy store in Toronto on December 26, 2010, as thousands of Canadians are scouring malls and stores today hoping to score deep discounts in the traditional Boxing Day sales. (THE CANADIAN PRESS/Chris Young)
Customers shop at a Best Buy store in Toronto on December 26, 2010, as thousands of Canadians are scouring malls and stores today hoping to score deep discounts in the traditional Boxing Day sales. (THE CANADIAN PRESS/Chris Young)


Why we spend what we do Add to ...

The I Am Rich iPhone application was pulled off iTunes a day after it hit the market. But before that happened, eight big spenders each shelled out $999.99 (U.S.) for the app, which doesn't do anything more than flash a glowing red gem onscreen. Its only purpose? To tell the world, um, "I am rich." A shocking price tag to most, but not Eduardo Porter. The New York Times editorial writer says dropping almost a grand on an iPhone app that doesn't do much isn't so different from coughing up thousands of dollars for a painting.

"The price is a signal about you, not about the thing," he explains. "When you pay something for something you're sending a signal about the quality of person that you are. About the resources at your command."

In his new book, The Price of Everything, Mr. Porter explores the history of pricing and the different psychological processes we go through when determining how much we're willing to pay - for everything from an Americano to printer ink. He spoke to The Globe and Mail from his office in New York.

Why do we seem to get greater satisfaction when we know we've paid more for something?

We have this empirical fact that we respond to prices at least for some goods in this weird way. People who have looked at brain scans have found that the higher price actually stimulates the brain. It's something that has to do with our neurological makeup. It's not that we're just told that expensive stuff is better and therefore we hold that as a memory and we use that as a rule of thumb; it seems to be something deeper than that.

You cite a study that was done on sports clubs: Participants could choose between a membership for $70 a month or buy a single pass. Even when people realize they aren't going as often and it would be the more economical choice to use single passes, they stick with their memberships. Tell me about the added value that comes from this.

It's the purchasing of a commitment device, right? You invest into this and you only reap the rewards. You pay money that you will only get back if you do meet the goal of, let's say, dieting or exercising or whatnot.

Is that also the strategy behind negative-option billing? You're not physically paying each time, taking that money out and parting with it.

There's convenience but it also makes it hard to compare prices. You just do it automatically. The more thoughtful process - of "Is this cheaper than this?' "Is this a better deal than that?" - gets swept under the rug.

Prices for consumer goods are determined by how much competition there is for them. The Internet was supposed to make it so much easier for us to find out how much product X costs at all stores without physically checking them out. Do you feel that it has had that effect? Are consumers more empowered now?

To be honest, I don't think so. I think this only encourages manufacturers to, in fact, make their things not easily comparable through changes in the settings, changes in colour, changes in shape, changes in the mode of payment, in adding or not adding transportation costs all these things that make it a little bit more of a chore to compare A and B.

Companies load computers with cookies and stuff [to]track how people are shopping. I think the Internet will allow a level of price discrimination we've never seen, because companies will have an amount of information about our shopping habits and our price elasticities that's going to be awesome. I think that would act against empowering us as consumers.

You say that when something is free we tend to consume a lot more than we would otherwise. Why are these offers of "Buy this product and get this other doohickey that you will have absolutely no use for" so enticing to consumers?

It seems like we're psychologically primed to like something for nothing. There is this great example with Amazon gift cards. If you offered a $20 card for $5 and a $10 card for $1, people would go for the $20 card because they were getting a $15 benefit rather than a $9 benefit. But if you drop each by a dollar so you were getting the $10 card for zero, people just move their preference to the zero, as if that number had some special significance. If we're paying zero it's better, no matter what.

This interview has been edited and condensed.

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