"In a market system, prices serve as an efficient allocation mechanism, ensuring that the people who really value goods and services are the ones getting access to them," explains Jesse M. Shapiro, Becker Fellow for the Gary S. Becker Center on Chicago Price Theory, founded by Richard O. Ryan, MBA �66 at the University of Chicago Graduate School of Business.
Many social programs focused on improving health in developing countries require active participation .Unlike a one-time vaccine, products ranging from condoms to insecticide must be used regularly in order to have any health benefit. The crucial role of household behavior in making such products work has led practitioners to search for new ways to ensure regular use among households receiving much-needed health products.
In the new study "Can Higher Prices Stimulate Product
Use?: Evidence from a Field Experiment in Zambia," Shapiro,
Nava Ashraf of Harvard Business School, and James Berry of
the Massachusetts Institute of Technology present results
from Lusaka, Zambia, on whether charging more for a home
water purification product (Clorin) resulted in greater use
of the product.
Almost 1.2 billion people worldwide lack access to clean
water, with water-borne diseases killing approximately 3.1
million people per year. Products like Clorin, distributed by
the Society for Family Health, the Zambia division of PSI, a
global non-profit, are a promising tool for addressing this
problem. Clorin kills pathogens in household drinking water,
reducing the incidence of water-borne illnesses that are
especially dangerous to young children.
In order to study whether charging more for Clorin results in greater use, the authors designed an experiment that would separate two effects of prices on product use. On the one hand, charging a higher price may help target distribution of the product to those who intend to use it most. On the other hand, the act of paying—or the amount paid—may exert a direct influence on use if households feel they must use a product to make the best use of the money they spent. These two effects—which the authors respectively call the "screening" and "psychological" effects of prices—combine to determine the effect of prices on product use.
The authors find strong evidence that higher prices screen out less intensive users of Clorin. For a given transaction price, increasing the offer price by 10 percent results in a 3.6 percent increase in reported use among buyers.
"We now have direct experimental evidence that people who really intend to use this health product are exactly the people who are willing to pay higher prices for it," says Shapiro. "The principle that prices can help you identify the people who are serious about using a product or service is likely to have wide applicability."
Turning to the psychological effect of prices, the authors find no evidence that charging a higher price causes households to increase their use of Clorin. However, their evidence suggests that paying something, as opposed to paying nothing, may cause greater use among recipient households.
The Field Experiment
"The strength of our research methodology is separating the
two effects of prices: determining the composition of buyers
and the decision to use the product," says Shapiro.
The study consisted of a baseline survey, a marketing session, and a follow-up survey. The survey design allowed the authors to study households that paid different prices and whether the price paid affects the decision to use the product. Variations in the offer price allowed the authors to study the impact of prices on the composition of buyers.
The baseline survey covered 1,260 households in Lusaka in May 2006, collecting basic demographic information as well as information about health attitudes and water treatment. In the last section of the interview, the surveyor tested the household�s drinking water for the presence of chlorine.
Two weeks after the baseline survey, a separate team conducted the marketing sessions: door-to-door sales of Clorin, offering one bottle at a one-time-only randomly chosen offer price to 1,004 households (80 percent of the original sample).
Households that agreed to buy were then given a randomly
chosen discount, thus varying the transaction price separately
from the offer price. Forty percent of households ultimately
received the product for free, even though all had agreed to
pay something for the product.
In a follow-up survey, the authors sent the original survey
teams to re-interview the households reached during the
marketing sessions. Surveyors repeated a handful of demographic
questions, followed by questions about health
knowledge, health attitudes, and hygiene practices. The
respondents were next asked about the household�s use of
Clorin. The survey team tested the household�s water as in
the baseline survey. Once they had concluded the measurement,
the team asked several questions related to the psychological
effect of prices.
Using the results of the marketing sessions, Ashraf, Berry, and Shapiro explored the effect of offer price on a household�s likelihood to purchase Clorin. As expected, higher prices resulted in fewer purchases. Raising the offer price by 100 Zambian Kwacha (Kw) reduced demand by about 7 percentage points.
The households that chose not to
buy when the price was high tended
to be those with a relatively low likelihood
of using the product. As a
result, use was highest among
households that agreed to pay the most for Clorin.
Moreover, the authors found some evidence that households
that had transacted for a positive price tended to use Clorin
more, though this effect was not statistically significant. Consistent
with psychological theory, this effect was especially
strong for households that reported they value purchased
products more than free products.
Overall, the study reports strong evidence for screening
effects, but mixed evidence for psychological effects of prices
on use.
Optimal Pricing Policies
The authors combined estimates of screening and psychological
effects of prices to develop a model that predicts product use
based on price. Charging higher prices for Clorin reduces demand, but helps target distribution to those households
most likely to use the product. For example, switching from a
free giveaway of Clorin to a sale at the common retail price of
800Kw would increase the proportion of usage among buyers
by almost 30 percentage points. Most of this effect comes
from changes in the composition of purchasing households,
though some also may come from the psychological effect of
the act of paying on subsequent use.
According to the policy simulation, moving from free distribution to a price of 100Kw increases usage by about 6.5 percentage points. Thereafter, use tends to decline with price, but this decline is relatively gradual because of the screening effects. The authors find that usage with prices does not decline below the level of usage with free distribution until the price exceeds 700Kw per bottle of Clorin.
Put differently, the authors find that the screening and
psychological effects allow a firm or government to achieve
the same level of Clorin use while charging a higher price.
This, in turn,means that the Clorin program can produce
greater revenue, which can in turn be reinvested in advertising
to promote use, or can be redirected to other valuable
social programs.
Pricing Controversy
Understanding the screening and psychological effects of
prices is critical to resolving public policy debates over the
appropriateness of user fees for access to social products
and services.
Ashraf, Berry, and Shapiro�s findings have important implications for economics and psychology, as well as for private and public sector industries in which product use is an important consideration.
"Our findings offer a new way to think about the pricing controversy," says Shapiro. "Charging higher prices for health products does have an obvious downside, which is that fewer people will get access, but the benefit is in targeting the distribution of the product to the people most likely to use it, as well as greater revenue for social programs. These issues need to be weighed against each other when making policy decisions about setting prices."
Can Higher Prices Stimulate Product Use?: Evidence from a Field Experiment in Zambia." Nava Ashraf, James Berry, Jesse M. Shapiro.