Journal of Economic Psychology 25 (2004) 557 563 www.elsevier.com/locate/joep The Euro in the common European market: A single currency increases the comparability of prices Thomas Mussweiler *, Fritz Strack Psychologie II, Universit at W urzburg, R ontgenring 10, 97070 W urzburg, Germany Received 11 February 2003; received in revised form 24 May 2003; accepted 5 June 2003 Available online 5 August 2003 Abstract Two studies examine the psychological consequences the introduction of the Euro has for the evaluation and estimation of product prices. Research on comparison processes suggests that a single currency increases the comparability of prices. If this is indeed the case, then a reference price from another European country should be more likely to influence evaluation and estimation of a target price, if both are given in the same currency. Results of two studies support these predictions. Participants evaluated (Study 1) or estimated (Study 2) a target price in the context of a low reference price. Target and reference price were either given in Euro as a single currency or in Euro and British Pounds as two distinct currencies. The low reference price exerted a stronger influence on evaluations and estimations of the target price if both were given in a single currency. We speculate that the increased comparability of prices that is a consequence of the introduction of the Euro may ultimately lead to lower consumer prices. Ó 2003 Elsevier B.V. All rights reserved. PsycINFO classification: 3040 JEL classification: D81 Keywords: Euro; Comparison process; Heuristics and biases * Corresponding author. Tel.: +49-931-312909; fax: +49-931-312812. E-mail address: mussweiler@psychologie.uni-wuerzburg.de (T. Mussweiler). 0167-4870/$ - see front matter Ó 2003 Elsevier B.V. All rights reserved. doi:10.1016/s0167-4870(03)00074-6
558 T. Mussweiler, F. Strack / Journal of Economic Psychology 25 (2004) 557 563 1. Introduction The Euro has had a difficult standing in public opinion. During its first year as the daily currency of most Europeans, the media were full of reports about European citizens that were discontent with the new currency. The core criticism was that in the perception of most citizens, the introduction of the Euro had led to sharp increases in the prices of many consumer goods. The German media even dubbed the Euro as Teuro, a coinage incorporating the German word for expensive ( teuer ) into the name of the new currency. This felt inflation is surprising, for at least two reasons. First, in reality the introduction of the Euro did not increase the actual inflation rate so that the felt inflation seems more apparent than real. Second, in principle the introduction of a unified currency may be expected to lead to lower prices. More specifically, creating a large common market in which prices for easily exchangeable goods are easy to compare may increase competition among retailers so that ultimately lower prices result. A British consumer who is planning to buy a pair of LeviÕs jeans, for example, may reevaluate how good a deal the offered price of 77,- Euro ( ) really is, if he learns that the exact same jeans are offered for a mere 65,- in a German department store. To the extent that the introduction of a single currency provides consumers with lower reference prices it may thus introduce additional market pressure towards lower prices. A reference price, however, is more likely to be used to evaluate a target price, if it appears to be a relevant comparison standard (Festinger, 1954; Kahneman & Miller, 1986; Mussweiler, 2003), and is easy to compare to the target price. A single currency is likely to foster both of these conditions. Prices that are given in a single currency are easier to compare than prices in different currencies, and are thus more likely to be used as comparison standards in price evaluations. A consumer who is thinking about buying a pair of LeviÕs may be more influenced by a low reference price of 65,-, if the offered price is 85,- rather than 47,- British Pounds ( ), even though both prices are identical. In the present research, we examine whether the comparability of prices and the resulting influence of a referent price on evaluations of a target price is indeed increased by a single currency. To do so, we asked participants to judge the prices of two target products, a pair of LeviÕs 501 and a bottle of Moet champagne. The target prices were introduced as stemming from a fictitious British discount store named Big D. For each participant target prices were presented in the context of two reference prices: A high reference price ostensibly stemming from the British luxury store HarrodÕs and a low reference price from the German department store Kaufhof. For half of the participants, all prices were presented in the same currency of the Euro. For the other half, the British prices (i.e., HarrodÕs and Big D ) were presented in British Pounds whereas the German price was presented in Euro. Thus the high reference price and the target price were always given in the same currency. The critical low reference price whose influence on judgments about the target price we wished to examine, however, was either given in the same or a different currency as the target price. If a single currency does indeed increase the
T. Mussweiler, F. Strack / Journal of Economic Psychology 25 (2004) 557 563 559 comparability of prices, then the low referent should have a stronger influence on judgments of the target price if both are presented in Euro. We used two distinct types of judgments about the critical target price to examine the extent to which the low reference price influences judgments about the target price: evaluations of the expensiveness of a given target price and numeric estimates of this price. In Study 1, we provided participants with a target price for the critical products (e.g., 77,- for the LeviÕs) and asked them to evaluate how expensive this price is along a Likert-type rating scale (1 ¼ not at all expensive, 9 ¼ very expensive). For this judgment type, the low reference price is likely to be used to anchor the response scale, which typically leads to judgmental contrast (Mussweiler, 2003; Ostrom & Upshaw, 1968). Relative to the low reference price, the target price appears to be more expensive. This well established contrastive influence of reference values on target judgments, allows to use the magnitude of the obtained contrast effect as a first indicator of the extent to which a given reference price was used to evaluate the target price. The more expensive a target price is judged to be, the more the low reference price was used as a comparison standard during evaluation. If a shared currency increases the comparability of prices, then participants should judge the target price to be more expensive if it is presented in the same currency as the low reference price. In Study 2 we used a different measure and did not provide participants with a target price. Instead, we asked them to give their best estimate of these prices. For example, participants were given both a high and low reference price for the pair of LeviÕs and were then asked to estimate how much the LeviÕs would cost in Big D. In such numeric estimates, the use of a standard or anchor typically leads to judgmental assimilation (Tversky & Kahneman, 1974). Using a low reference price leads judges to selectively activate information indicating that the target price is similar to this low price (Mussweiler & Strack, 1999a, 2000) so that lower estimates result (for a discussion, Mussweiler & Strack, 1999b, 2001). This well established assimilative influence, allows to use the magnitude of assimilation as a second indicator of the extent to which the low reference price was used in judgments about the target price. The lower the estimate, the more the low reference price was used as a standard. If a single currency increases the comparability of prices, then judges should estimate the target price to be lower, if the low reference price and the target price are given in the same currency. 2. Experiment 1 2.1. Method We recruited 23 students at the University of W urzburg for a brief questionnaire study. Participants were approached while working in individual cubicles in the university library and were offered a chocolate bar as a compensation for participation. We handed participants the questionnaire and asked them to read instructions carefully. The instructions pointed out that the present study examined how well
560 T. Mussweiler, F. Strack / Journal of Economic Psychology 25 (2004) 557 563 German consumers are informed about prices in other European countries. To do so, we would ask them to evaluate two target prices that ostensibly stemmed from a fictitious British discount store ( Big D ). Because evaluating these prices was a difficult task, we would also provide them with two reference prices for each product, one ostensibly from the British department store HarrodÕs, the other from the German department store Kaufhof. All participants were then asked to evaluate two target prices: the equivalent of 77,- for a pair of LeviÕs 501, and the equivalent of 47,- for a bottle of Moet champagne. Along with these target prices each participant received two reference prices. The low reference price that ostensibly stemmed from the German Kaufhof was the equivalent of 65,- for the LeviÕsand 38,- for the champagne. The high reference price that ostensibly stemmed from the British HarrodÕs was the equivalent of 85,- for the jeans and 52,- for the champagne. The high reference price was included to provide participants with additional background information and was always given in the same currency as the target price. The low reference price was the critical standard whose influence on target evaluations we wished to examine and was thus either given in the same or a different currency as the target price. For the half of the participants in the single currency condition, all prices were given in Euro. For the half in the distinct currency condition, the low German reference price was given in Euro, whereas the target price and the British reference price were given in British pounds. The pound prices corresponded with the rounded equivalent of the Euro prices and were 53,- and 47,- for the jeans and 32,- and 29,- for the champagne. Participants in the distinct currency condition also received the exchange rate at that time ( 1.62 to 1). For both target prices participants indicated their impression of how expensive the product was in Big D along a 9-point rating scale ranging from 1 ( not at all expensive ) to 9 ( very expensive ). After completion of the questionnaire, participants were thanked for participation, debriefed and offered their compensation. 2.2. Results We expected that participants are more likely to use the low reference price from the German department store as a comparison standard to evaluate the target price if both are presented in the same currency. On the subjective judgment scale used in Study 1, the use of a comparison standard is apparent in judgmental contrast: Relative to the low reference price in the German department store, the target price appears to be expensive. Our results are consistent with these hypotheses. As expected, participants evaluated the target price to be more expensive if all prices were given in Euro (M ¼ 6:30, SD ¼ 1:32) than if they were given in distinct currencies (M ¼ 4:79, SD ¼ 1:81), tð21þ ¼2:25, p < 0:04. This suggests that participants did indeed rely more heavily on the low reference price, if the target price was expressed in the same rather than a distinct currency. Consistent with our assumptions, a shared currency thus increased the comparability of prices.
3. Experiment 2 3.1. Method We recruited 39 students at the University of W urzburg. For the most part, the materials and procedures were identical to those used in Study 1, with one exception. Instead of asking participants to evaluate given target prices for the two products, we asked them to estimate these prices. All participants received a low reference price from the German Kaufhof and a high reference price from the British HarrodÕs. They were asked to give their best estimate of the price of a pair of LeviÕs 501 and a bottle of Moet champagne in the fictitious British discount store Big D. For the half of our participants in the single currency condition both reference prices as well as the estimate of the target price were given in Euro. For the other half, the reference price from the German Kaufhof was given in Euro, whereas the reference price from the British HarrodÕs as well as the estimate of the target price were given in Pounds. Participants in the distinct currency condition also received the exchange rate at that time. 3.2. Results T. Mussweiler, F. Strack / Journal of Economic Psychology 25 (2004) 557 563 561 Again, we expected that participants are more likely to use the critical low German reference price as a comparison standard in estimating the target price if both are given in the same currency. For the numeric judgments made in Study 2, the use of a comparison standard is apparent in judgmental assimilation: Lower estimates result if a low comparison standard is used as a judgmental anchor (Mussweiler & Strack, 1999a; Tversky & Kahneman, 1974). To combine price estimates for the two products into one measure, the individual estimates were z-transformed. As expected, participants estimated the target prices to be lower, if their estimate and the low reference price were given in the same currency (M ¼ 0:37, SD ¼ 0:95) than if they were given in distinct currencies (M ¼ 0:35, SD ¼ 0:60), tð37þ ¼2:84, p < 0:01. As in Study 1, these results indicate that participants relied more heavily on the low reference price, if the critical estimate was given in the same rather than a distinct currency. 4. Discussion In this research we examined whether a shared currency influences the comparability of prices. In two experiments, a low reference price yielded a stronger influence on judgments of a target price, if both were given in Euro rather than in distinct currencies. In Study 1, this enhanced influence was apparent in the fact that a given target price was judged to be more expensive if it pertained to the same currency as the low reference price. In Study 2, estimates of the target price were more strongly assimilated to the low reference price, if both pertained to the same currency. Judges
562 T. Mussweiler, F. Strack / Journal of Economic Psychology 25 (2004) 557 563 thus estimated the target price to be lower if this estimate was given in the same currency as the reference price. The stronger influence on target judgments indicates that prices in a single currency are more likely to be compared. This may be the case because prices given in a single currency appear to be more relevant for one another (Festinger, 1954), or because the comparison itself is easier to compute (Lemaire & Lecacheur, 2001). Notably, presenting target and reference prices in distinct currencies limited the comparability of prices, even though participants had all the information necessary to make the relevant comparisons. In both studies participants were informed about the critical exchange rate, so that they could have transformed the given prices into a single currency. The fact that even in this situation the currency format had strong effects, suggest that it may be more influential in our daily lives, where the critical information is less readily accessible. From a more general perspective, these findings allow to speculate about potential influences of the Euro on consumer prices. In particular, our results suggest that the introduction of the Euro as a single currency for most European countries may ultimately lead to lower consumer prices. As a consequence of the introduction of the Euro, all product prices from Euro countries become relevant reference prices. To the extent that consumers primarily focus on the best deal they could potentially get on a given product, the larger the pool of potential reference prices, the higher the chances to find a particularly low reference price. Given that such a low reference price influences how expensive an offered price is perceived to be, consumers who are trying to get the best possible deal may be less willing to pay a price that is substantially higher than the low reference price. If this is indeed the case, then the introduction of a single European currency may indeed create additional market pressures towards lower prices. Although this reasoning clearly remains speculative to some extent, it is well consistent with research on the consequences of comparison processes in other domains (for an overview, see Mussweiler, 2003). Acknowledgements The present research was supported by grant from the German Science Foundation (DFG). We would like to thank the members of the W urzburg Social Cognition Group for fruitful discussions of this research and Lysann Damisch, Tania Hundhammer, Yvonne Moller and Sebastian Werner for their help in data collection. References Festinger, L. (1954). A theory of social comparison processes. Human Relations, 7, 117 140. Kahneman, D., & Miller, D. T. (1986). Norm theory: Comparing reality to its alternatives. Psychological Review, 93, 136 153. Lemaire, P., & Lecacheur, M. (2001). Younger and older adultsõ strategy use and execution in currency conversion tasks: Insights from French Franc to Euro and Euro to French Franc to Euro conversions. Journal of Experimental Psychology: Applied, 7, 195 206.
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