Tuesday, December 12, 2006

Beer and Tuition

Two articles, in the December 12th NYT, when viewed together, describe what Moneylaw advocates are up against.

The first, on the front page, notes that colleges have found that raising tuition can and has led to increases in applications and admissions. In what amounts to retilting the conventional demand curve, the explanation is the price is used as a signifier of quality.

Well, maybe, maybe not. Two other possibilites, more in keeping with MoneyLaw (and Class bias) discussions, are possible. The "Veblen effect" or conspicuous consumption occurs when people pay for a high price. Yes, the price itself becomes a desired characteristic of the product. The higher the price, the more you are willing to pay. "Snob effects" are a little different. Here we are talking about a desire to create the impression that one is different and, usually, superior to others. "Veblen effects" are more about demonstrations of wealth while "snob effects" are more closely connected to "better" taste. Both involve communicating to others. The point is that the "high price equals higher quality" rationale initially offered by the Times may miss what is really going on. What the article may tell us is something known by advertising people: There is a huge market for interpersonal signaling devices.

But hold that thought for a minute.

Article two describe a marketing/psychology experiment that has been performed repeatedly although maybe not with beer. In any case (pun intended), the experiment consisted of tasting two beers, identical except that one contained a few drops of vinegar. People who tasted the beer before being told that one contained the vinegar preferred, on balance, the invinegarated beer. People who were told ahead of time what the difference was found the invinegarared beer clearly inferior. This article tells us about the importance of preconceptions in forming opinions.

Together the articles tell us a complete story. The message is that that signals -- elite school credentials -- have a value to buyers that is independent of the substance of the product underlying the signal and that that those who receive those signals are highly vulnerable to their preconceptions.

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