A Colleague of mine recently attended an auction where he bid for a certain old clock. Few weeks later, he noticed a similar clock on e-bay. He ended up buying it at almost 40 per cent higher price! As natural economists, we should be interested in knowing why my friend paid such a premium. The answer lies in our (economic) behaviour with credit cards. What of it?
We all make impulsive purchases with credit cards. You are window-shopping and then you see this interesting object that could add character to your living room. The object — a piece of modern art that is difficult to describe — is expensive. But you can use your credit card to make the purchase. You do so! Why?
Paying cash is painful. Economists have conducted several experiments to document consumer behaviour. We buy only if we believe that the utility that we can derive from the product is greater than the pain we will suffer from paying for it.
Credit card alters this equation. It numbs the pain of payment, as cash moves out of our bank account several weeks later. My friend paid 40 per cent more for a similar clock. Did the mode of payment (credit card for ebay) have anything to do with it? My friend denies so. But research conducted in similar area suggests that credit cards could be a factor driving the economics.
Consider this. Two professors conducted a real-life auction for buying tickets to a certain game in the NBA league. Half the subjects had to pay cash and the other half, credit cards. The study found that the average bid through credit card was twice as much as that of the cash bid! The authors called it the credit-card premium. The reason for such premium is the same — the pain of debit is less with plastic than with cash. So, we yield to the temptation, spending way beyond our means. And that could drive a huge hole in our bank account — eventually.
Posts
