The Price Was On Sale

In 2008, a neuroeconomics laboratory at the California Institute of Technology poured the same Cabernet Sauvignon into two glasses. One was labeled $5. The other was labeled $45. Twenty subjects drank both inside a brain scanner.¹

The subjects were healthy, right-handed, between twenty-one and thirty years old, screened for liking red wine. They did not know the glasses contained the same liquid. The scanner tracked blood-oxygen-level-dependent activity in real time as they tasted.²

The $45 wine tasted better. Not "they said it tasted better." The medial orbitofrontal cortex, the region that processes experienced pleasure, showed higher activation for the glass with the higher price. The brain manufactured more pleasure from the same liquid based on the number on the label.²

The researchers ran a second condition. A $10 wine presented as $90. Same result. The price changed the taste. Not the reported taste. The experienced taste. The pleasure was neurologically real. The brain produced it. The number on the label was the ingredient.²

That same year, a researcher at Yale organized more than 6,000 blind tastings with 506 participants sampling 523 wines ranging from $1.65 to $150 per bottle. Double-blind. Neither the server nor the taster knew what was in the glass. The correlation between price and enjoyment was small and negative. Non-expert drinkers slightly preferred cheaper wines.³

The two studies fit together. When the label is visible, the expensive wine tastes better. When the label is removed, the preference reverses. The label is not helping you choose a wine you already prefer. The label is creating the preference. The subjects in the scanner were not performing for the researchers. Their orbital cortex was responding to the number before their conscious mind had formed an opinion about the wine. The experience was manufactured below the level of choice.

In a separate study, a team at MIT, Stanford, and Caltech tested a pain reliever on eighty-two subjects. Half were told the pill cost $2.50 per dose. Half were told it had been discounted to ten cents. Both pills were placebos. Neither contained any active ingredient. Eighty-five percent of those who took the "expensive" pill reported significant pain relief. Sixty-one percent of those who took the "cheap" pill did. Same nothing. Different price. Different physical experience of pain reduction.⁴

The process, the researchers found, "appears not to be conscious." The price changed the experience of pain. Not the belief about the experience. The experience itself. The body responded to the number on the label the way the tongue responded to the number on the wine glass.⁴

The price does not distort a judgment you were going to make. The price creates the experience you are having.

This has been replicated. In 2017, a team at the University of Bonn confirmed the wine effect and identified a second neural region, the anterior prefrontal cortex, involved in translating price information into taste experience. In 2021, a field experiment with 140 participants found the same pattern outside the laboratory. No failed replications have been published.⁵

The finding is not limited to luxury goods or laboratory conditions. The mechanism runs on the relationship between a number and an experience, and the number always comes first.

If the number on the label changes what you taste, what does the number on the price tag change?

The experiment

Seventeen months

In 2011, JCPenney ran 590 different sales events. The company spent $1.2 billion executing them. Seventy-two percent of its $17.3 billion in annual revenue came from products sold at discounts of 50 percent or more off the initial list price. The "original" prices were not original. They were the numbers that existed so the "sale" numbers could exist.⁶

That November, the board hired Ron Johnson. Johnson had spent eleven years at Apple, where he built the retail stores from nothing into the highest-grossing retail operation per square foot in the world. He looked at JCPenney's pricing and saw what anyone with a spreadsheet would see: the sticker prices were fiction. The discounts were the real prices. The entire apparatus of markdowns, doorbusters, limited-time events, and $10-off-$25 coupons existed to make the customer feel something about a number that was never what it claimed to be.⁷

He eliminated it. On February 1, 2012, JCPenney launched "Fair and Square" pricing across all stores. Three tiers. Everyday prices roughly 40 percent lower than the old fictional stickers. No coupons. No manufactured urgency. Honest numbers.⁷

Same-store sales fell 18.9 percent in the first quarter. The decline accelerated. By the fourth quarter, same-store sales had dropped 32 percent, a collapse several analysts called the worst quarter in retail history. Revenue fell by roughly a quarter in a single year. The company posted a net loss of $985 million. The stock, which had traded above $40 when Johnson was hired, fell 57 percent.⁸⁹¹⁰

The products on the racks had not changed. The stores had not moved. The employees were the same people. The only thing that had changed was the number next to the number. The crossed-out sticker that told the customer what they were saving. Without it, the customers could not see the value. The value had never been generated by the product. The value had been generated by the gap between two numbers. One of the numbers was gone.

Johnson was fired on April 8, 2013. He had been CEO for seventeen months.¹⁰

His replacement, Mike Ullman, restored coupons almost immediately. Posted discounts on the company's Facebook page for the first time in more than a year. Promised twenty-six annual promotional events. The promotional pricing returned. Revenue stabilized.¹¹

One company, in a controlled and public manner, tested whether customers wanted the real price. The answer was no. The customers wanted the feeling. The feeling required the fiction.

Johnson said afterward that the core customer had been "much more dependent and enjoyed coupons more than I understood."¹² He chose the wrong framing. Not coupon-dependent. Anchor-dependent. Remove the anchor and the customer did not think more clearly about the shirt in their hand. The customer stopped being able to evaluate it at all. A person holding a blouse at JCPenney had no idea whether $14 was a good price for it. Not because they were irrational. Because the $14 had no reference point next to it. The crossed-out $24 was fiction. But the fiction was the only input the brain had for producing a judgment. Without it, the brain had nothing to work with.

JCPenney did not remove a trick. JCPenney removed the floor.

Big Blue

JCPenney survived by restoring the anchor. Bed Bath & Beyond did not restore it in time.

The 20 percent off coupon arrived in the 1990s. The company tested red and yellow before settling on Pantone 2735c, a specific shade of blue that became the brand itself. At peak, Bed Bath & Beyond mailed nearly a billion of them per year. Customers stockpiled them in glove compartments, junk drawers, purses. They drove past closer stores to use one. Inside the company, it was known as "Big Blue." It appeared in the movie Old School. It was found in the junk drawer of the fugitive mobster Whitey Bulger.¹³

Rita Little, the company's former vice president of marketing, described what the data eventually showed: "We started to realize that what customers really wanted was the darn coupon. To hell with the rest of the stuff."¹⁴

The coupon had become the brand. Not a representation of the brand. The actual brand. The blue rectangle was the reason to enter. The products inside the store were what you bought while you were there. Customers who received the coupon visited. Customers who did not receive it stayed home. The 20 percent off was not a promotional tool supporting a retail business. The retail business was a physical space that existed to give the 20 percent off a location.

In November 2019, the board hired Mark Tritton from Target to fix the dependency. Tritton had overseen the launch of more than thirty private-label brands at Target. He believed the same playbook would work at Bed Bath & Beyond. He launched nine owned brands. He pulled national labels from shelves and replaced them with names no customer recognized. He reduced the coupon program. An internal study of 405 million shopping baskets had found that roughly 40 percent of the company's promotions were ineffective. The company decided to act on that finding.¹⁵¹⁶

Revenue fell from a peak of $12.3 billion to $5.34 billion in the final fiscal year, a 57 percent decline. The company filed for Chapter 11 on April 23, 2023. Three hundred and sixty stores. All closed by summer. On April 26, three days after the filing, the company stopped accepting coupons.¹⁷

The coupon was not supporting the business. The coupon was the business. The product on the shelf was the occasion for the feeling, and when the feeling left, the customer left.

JCPenney is the experiment. Bed Bath & Beyond is the autopsy. Same finding, different ending. One company offered the real price and the customer punished it. The other company tried to build a business that did not need the anchor, and the business ceased to exist.

The pattern does not require a corporate failure to observe. In a 2023 class action, plaintiffs showed that more than 9,000 products listed on a major department store's website had been "on sale" for at least 46 days out of every 90-day window. Some had been on sale for 90 days out of 90. A portable speaker was listed at a "regular" price and a "sale" price. The speaker had never been offered at the regular price. The Federal Trade Commission's guidance on the matter is plain: "If the former price being advertised is not bona fide but fictitious, the 'bargain' being advertised is a false one." The guidance has been in place for decades. The practice has only accelerated.¹⁸¹⁹

The floor

In 1974, two psychologists published a study in Science. Subjects watched a roulette wheel that had been rigged to land on either 10 or 65. They were then asked to estimate the percentage of African countries in the United Nations. The group anchored at 10 estimated 25 percent. The group anchored at 65 estimated 45 percent.²⁰

The anchor was a roulette wheel. It had no connection to the question. It moved estimates by twenty points.

Twenty-nine years later, a behavioral economist asked students to write down the last two digits of their Social Security number, then bid on items at auction. The results split by quintile.²¹

For a bottle of Cotes du Rhone, the top quintile bid $27.91. The bottom quintile bid $8.64. Their Social Security number set the price they were willing to pay for wine.²¹

The standard interpretation of these experiments is that the anchor distorts your judgment. You have a real sense of what the thing is worth, and the anchor pulls you away from it. The implication is reassuring. Underneath the distortion, a clear-eyed evaluation exists. Remove the anchor and you will think more accurately.

JCPenney removed the anchor. The customers did not think more accurately. They stood in the aisle, holding the same product they had purchased a hundred times, and could not determine whether they wanted it. Then they left.

You do not have a real price. You never did. The anchor is not distorting a judgment you would have made. The anchor is creating the only judgment you can make. Pull it out and you do not think more clearly. You stand in an aisle holding a shirt and you have no idea whether $14 is a good price. Not because you are irrational. Because there is no rational basis to compare it against. You have never manufactured a price for a shirt from first principles. You have never calculated the cost of cotton, thread, labor, transportation, rent, and margin and arrived at a number. Nobody has. The anchor was the floor. The store removed the floor.

A separate study tested whether informing people about anchoring reduced the effect. Researchers told subjects that the bias existed, explained how it worked, and offered financial incentives to resist it. The anchoring effect persisted. It operated, in the researchers' words, "unintentionally and nonconsciously." Knowing did not help. Understanding the mechanism did not reduce its power. The subjects knew the roulette wheel was irrelevant. They adjusted their estimates toward it anyway.²²

This separates the mechanism from deception. Being tricked requires ignorance. Anchoring does not. It works on subjects who are informed. It works on experts. It works on the people who designed the experiments. The question is not whether the anchor misleads your judgment. The question is whether you have a judgment without it.

This is what the wine study proved at the neurological level. The brain does not have an independent assessment that the anchor overrides. The brain uses the anchor to produce the assessment. Remove the anchor and the brain has no input. The experience does not become more accurate. It becomes nothing. The JCPenney customer standing in the aisle is the wine drinker without a label. The glass is in their hand. The liquid is the same. And there is no experience to be had.

The anchor is not a trick your rational mind can override. The anchor is the raw material your rational mind requires in order to function.

The letter

The average published tuition and fees at a private nonprofit college in the United States is roughly $45,000 per year. The average institutional discount rate, the share of sticker price covered by the school's own grants, is 56.3 percent. More than 83 percent of undergraduates receive institutional grant aid.²³²⁴

The family opens the financial aid letter in the kitchen. The sticker says $45,000. The grant says $28,000. "Your price" says $17,000. The parent looks at the child. The child looks at the number. The $28,000 feels earned. The family celebrates the scholarship.

Twenty years ago, the average discount rate at private nonprofits was under 40 percent. It is now 56.3 percent. The sticker has roughly tripled in nominal terms over two decades. The net price, adjusted for inflation, has actually declined.²⁵

The price students pay in real dollars went down. The price printed on the letter went up. The two numbers moved in opposite directions for two decades. The sticker has been rising faster than the actual price because the gap between them is the product. The wider the gap, the larger the "scholarship." The larger the scholarship, the more the family feels it received something. The school was always going to charge approximately what it charged. The sticker exists so the aid letter can exist. The aid letter is the coupon.

Endowments fund only 12 percent of institutional grants. The remaining 88 percent comes from tuition revenue. Which means the tuition paid by one family is funding the "scholarship" that appears on another family's letter. The money circulates. The feeling of receiving a grant is real. The grant, as a reduction from a price someone was going to pay, is not.²³

In 2022, the Government Accountability Office examined more than 500 financial aid offers from a nationally representative sample of colleges. Ninety-one percent did not include an adequate net price. Twenty-two percent provided no cost information at all, listing only aid amounts. The family received a number showing what was given. Not a number showing what remained.²⁶

A separate study examined over 11,000 financial aid award letters from 455 institutions. The researchers found 136 unique terms for unsubsidized student loans. Twenty-four of those terms did not include the word "loan." Nearly 15 percent of letters included Parent PLUS loans, which are debt instruments requiring full repayment with interest, as "awards."²⁷

The sticker is the reference point. The aid is the feeling of saving. The structure is the same one that ran JCPenney's 590 annual sales events. The same one printed on price tags that were never sold at face value. The same one that produced different pleasure from the same wine in a laboratory in Pasadena. The stakes here are a hundred times higher. The mechanism is identical. The family who celebrates the scholarship is the customer who celebrates the sale. The number on the letter is the number on the label. The feeling it produces is real. The reduction it represents is not.

The inversion

The mechanism runs in both directions.

A Birkin bag retails for $13,500 to $14,900 in the United States. You cannot buy one by walking into a store. The standard path requires spending tens of thousands of dollars on other products, scarves, shoes, tableware, belts, before a sales associate "offers" you the chance to purchase one. Reports from competitive boutiques place the pre-spend between $20,000 and $50,000. In a recent antitrust lawsuit, plaintiffs alleged spending tens of thousands of dollars on ancillary products before being offered the chance to purchase.²⁸

On the secondary market, Birkins trade at roughly 1.4 times their retail price. The customer who navigates the pre-spend requirement and pays $13,500 holds an object that can be resold for approximately $19,000 the same week. At the 2022 peak, the ratio was 2.2 times retail. Over the past decade, Birkins appreciated 92 percent. The restriction does not destroy value. The restriction creates it.²⁹

A nineteenth-century economist identified the category: goods where higher prices produce higher demand. The price is not an obstacle to purchase. The price is the reason for purchase. The customer is paying because of the cost, not despite it.³⁰

The high price creates the feeling of worth the way the sale creates the feeling of saving. Both are selling the reference point, not the object. One says: this was expensive and now it is yours for less. The other says: this is expensive and you earned the right to pay. Same mechanism, opposite direction. The JCPenney customer and the Birkin customer look like they are making opposite decisions. One is hunting for a deal. The other is paying a premium. But both are purchasing a feeling that the number on the tag produces.

The wine study confirmed this in both directions. The $45 label did not just add pleasure to the $5 wine. The $5 label subtracted pleasure from the $45 wine. The brain does not apply a premium in one direction. It constructs the entire scale from the reference point, high to low.

JCPenney's customer lost the anchor that made $14 feel like saving. The Birkin customer accepts the anchor that makes $13,500 feel like earning. In both cases, the number is the ingredient.

The tag

Before the price tag, every transaction was negotiated. The merchant named a price nobody expected to pay. The customer countered. They met somewhere near where the merchant had intended to sell from the start. The "discount" was built into the opening bid. The feeling of getting a deal was not an accident of the bazaar. It was the bazaar's operating system. The practice is at least a thousand years old.

Quaker merchants in the eighteenth century practiced fixed prices on religious principle. Charging different prices to different customers was, in their view, a form of dishonesty. A New York department store adopted the practice in 1846. A Parisian retailer implemented it in 1852.³¹ But fixed pricing did not become the American standard until a Philadelphia merchant opened the Grand Depot, a former Pennsylvania Railroad freight station at 13th and Market, in 1876. One price, printed on a tag, non-negotiable, the same for everyone who walked in.³²

The innovation was transparency. The customer did not need to negotiate, did not need to wonder whether they were paying more than the person before them. The price tag was the honest invention. It eliminated the game.

Within two years, the same merchant introduced the first American "White Sale," in January 1878.³³ The fixed price had created a visible reference. The visible reference had become the anchor. And the sale, the marked-down price presented next to the "original" price, was born from the tool that was supposed to make sales unnecessary. The price tag did not kill the ancient feeling of getting a deal. The price tag gave it a permanent address.

The price tag was invented to kill the game. Within a generation, the price tag became the game's infrastructure.

The wine

Return to the laboratory. Twenty people, two glasses, the same liquid. A different number on the label, and a different experience in the brain.

You do not have a price for anything, not the shirt, not the mattress, not the tuition. The wine study proved it at the neurological level. JCPenney proved it at the commercial level. Bed Bath & Beyond proved it at the existential level. The roulette wheel and the Social Security number proved it under controlled conditions where every other variable was removed. Every price you have ever evaluated was evaluated against a reference point someone else supplied. The reference point is not helping you judge. The reference point is the only judgment you have.

And the reference point is never neutral. It is placed there by someone who benefits from where it sits. The sticker. The "original" price. The scholarship letter. The "compare at" tag. The asking price. The MSRP. Each one was positioned to make the number next to it feel like something.

This is not a piece about being deceived. The reader who shrugs and says "I know sales are fake" is proving the finding, not refuting it. JCPenney offered the real price. The customer said no. Bed Bath & Beyond tried to build a business that did not need the anchor. The business died. The customer does not want the trick removed. The customer wants the feeling the trick produces. And the wine study showed why. The feeling is not a trick. The feeling is neurologically real. The brain manufactures it from the number on the label before your reasoning has anything to evaluate.

The same structure runs in every direction. The sale that makes $79.99 feel like saving. The restriction that makes $13,500 feel like earning. The scholarship that makes $17,000 feel like a reward. The price tag that was invented for transparency and became the instrument of the anchor. In each case, the object is the occasion and the number is the ingredient. The feeling is what gets sold.

Every reference point in your life was placed by someone. The mortgage rate your broker quoted was quoted against the rate he showed you first. The salary on the offer letter was written after the salary on the job listing. The asking price on the house was set to make the closing price feel like winning. The "compare at" tag. The MSRP. The sticker. Every number exists to make the number next to it feel like something. The question the wine study answered is whether that feeling is a distortion or a creation. The answer, visible in the medial orbitofrontal cortex of twenty people drinking the same Cabernet Sauvignon, is that it is a creation. The feeling is as real as the wine.

Same liquid. Different number. Different taste.