# Why does a buyer value a dollar in a small purchase (e.g. TV) differently to a dollar in a large purchase (e.g. car)?

I am referring to how buyers will haggle over 200 when purchasing an item worth, say, 500 but not bat an eyelid paying an extra 5000 on, say, a house.

I am seeking a very brief explanation of this phenomenon or the official name (if it has one).

• One thing that pops into my mind with your example (however it is not true for all examples) is that a house may be seen as more of a necessity than a television. Therefore, people may be willing to spend more on the house because they see it as a need rather than a want. – DornerA Jun 7 '16 at 19:57

## 3 Answers

One explanation from psychology and behavioral economics is "mental accounting": people put different transactions into different mental accounts.

When buying a house, people are imaging (probably unconsciously) a bank account dedicated to that purpose. The account's balance is pretty large (including mortgage loans). \$5000 in or out of this account does not really have any significant impact on the account. When buying a cellphone, people are imaging a separate bank account, of which the size is much smaller than the home purchasing account. \$500 in or out of this mental account makes a big difference.

If we pool all accounts together, then \$500 saved from buying a cellphone should be the same as the \$500 saved from buying a house.

Interesting question.

While I am not familiar with any economic literature on this subject, here are some thoughts that might get you started:

• Psychological Effect - Committing to the Idea of Spending a Large Sum of Money: I tend to think that when people make large purchases, they commit themselves - ahead of the actual purchase - to the idea of spending a large amount of money. Committing can take on many forms - accepting the fact you're going to spend a lot of money, imagining having the product, etc... So after committing to it, they are less sensitive to an another 500 dollars here or there, as you mentioned. Imagine you planned to buy a new flatscreen TV priced 5000 dollars, once your new wage comes in, say in two weeks time. During that time you build up the anticipation: You imagine how great it will be to have it, you tell your friends about your plan, etc. You commit. So if you end up getting to the store and finding out it costs 5500 dollars - 500 more - won't you be more inclined to "let it slide" and buy the TV anyway, than if you thought about buying a ring on your back home from work only to find out is more expensive than you thought?

• Different Purchase suggest different preferences?: Another possible explanation could be that there is an innate difference in preferences between people who tend to make large purchases and people who tend to make small purchases. Generally speaking, it might be possible to assume that the first type have higher incomes, and therefore their marginal utility from another dollar, in any scenario, is smaller.

• Percents?: This is probably the most straightforward answer. When you state the problem in terms of percents of the entire purchase and not actual dollars (I believe it is closer to how people actually frame the problem when they do their "utility calculations"), then 5000 dollars more on a house are really a smaller percent than 200 more dollars on, say, a new phone.

First off, it's important to note that in the aggregate, most people tend to haggle over big ticket items more often than small purchases. However, if the preferences are flip flopped, it could be because of:

• Information Asymmetry: People tend to know what they want out of a TV or their everyday groceries. Differences are easily noticeable and usually measurable. But a big purchase like a house, car, or even computers have a lot of different qualities to them. It's harder to know how much you'll value those extra qualities you might stumble upon. Behaviorally speaking, people act myopically, so if the cost of determining (and justifying) why you want a better price for something seems high enough, then you might just forego bargaining altogether.
• Prospect Theory: Building off of that, people operate on the idea of relative losses and gains. With gains, people tend to be risk averse, and not want to risk a lot when they are "ahead" for some time period, but for losses, people becoming more willing to take on risk (for a chance of eliminating their current losses for some time period). For smaller purchases, the possibility of "losing out" might be higher, leading to more bargaining, whereas for a big purchase, a large range of values might give you a relative gain, to which you don't feel as inclined to bargain.