December 18, 2014

Gratitude or Guilt? People Spend More when They "Pay-it-Forward"


Minah Jung.

As shoppers across the nation embark on holiday shopping deals, Minah Jung, PhD 15, and Leif Nelson, associate professor of marketing at UC Berkeley’s Haas School of Business, took a look at what happens to commerce when there’s no set price tag. In their study of consumer behavior, they found that shoppers spend more money when they participate in a chain of good will known as “Pay-it-forward” than when they can name their own price.

“It’s assumed that consumers are selfish and always looking for the best deal, but when we gave people the option to pay for someone else, they always paid more than what they paid for themselves,” said the study’s lead author, Minah Jung. Jung is also a Gratitude Dissertation Fellow at UC Berkeley’s Greater Good Science Center that focuses on the science of a “meaningful life,” including psychology, sociology, and neuroscience.

The study, “Paying More When Paying for Others: Consumer Elective Pricing with Pay-It-Forward Framing,”  is co-authored by Ayelet and Uri Gneezy, both professors at UC San Diego’s Rady School of Management and was presented at the annual meeting of the Society for Personality and Social Psychology, the Association for Consumer Research, and other conferences.

The results shed new light on the psychological and social forces – such as fairness, obligation, and reciprocity – that guide consumer decisions beyond getting the best deal. For example, the study found that people typically overestimate the financial generosity of others, until they learn what others have actually paid.

“People don’t want to look cheap. They want to be fair, but they also want to fit in with the social norms,” said Jung.

Pay-it-forward vs. Pay-what-you-want

Pay-it-forward is a pricing scheme in which patrons are told that a previous customer has paid for them. The new customer then gets the opportunity to pay for someone else. Such random acts of kindness have been reported at toll bridges, coffee shops and drive-thru restaurants, and they drive the business of Berkeley’s Karma Kitchen.

Alternately, “Pay-what-you-want” is an economically similar approach in which the consumers have the option to pay any price they want. It’s used by such profitable companies as video game distributor Humble Bundle.

In eight separate experiments, Jung and co-authors compared how more than 2,400 individuals responded to these two elective pricing models at such venues as San Francisco’s Cartoon Art Museum, the farmers market at Oakland's Jack London Square and in laboratory settings. At the museum and at the farmers market, consumers consistently paid more for another customer than for themselves when purchasing a cup of coffee or the price of admission.

The same dynamic occurred in lab settings in which UC Berkeley students were given coffee mugs sporting the “Cal” logo. While some were given the choice to pay what they wished for the mug, others were told someone else had paid for the mug and that they could pay for someone else’s mug. Again,
those who paid it forward spent more. In a twist, however, students who were told exactly what the previous person paid adjusted their payment to the same amount or a little less.

The researchers also tested the hypothesis that participants under the pay-it-forward scenario might be influenced to pay more if they become acquainted with the person who had previously covered their cost. However, they found no difference in the amount students shelled out, even after meeting their potential benefactor.

Better to give than receive

That said, the study found that participants gave more when they could write a message or the amount they had paid on a note to the recipient. Moreover, at Berkeley’s Karma Kitchen, where there are no prices on the menu because meals are paid forward by prior customers, diners were handed one of two cards after their meal. One emphasized the gift of giving, and the other of receiving. Those who were reminded of the principle of giving ultimately shelled out more.

"The results suggest that businesses that rely entirely on consumers’ regard for others or ‘social preferences’ for non-selfishness can survive and even thrive,” Jung said. “It’s pretty amazing.”

The study is funded by a National Science Foundation Graduate Research Fellowship and Greater Good Dissertation Fellowship, the Haas School of Business’ Garwood Center for Corporate Innovation, and the Barbara and Gerson Bakar Faculty Fellowship.

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