A recent New Yorker article Clawback describes, in fairly good detail, what has been happening with the lobster market in recent years. Here’s the gist of the story: Lobsters are cheap, but we are still paying quite a lot of money for them.
Apparently, global warming has been quite good to lobster populations, flooding net traps with crustaceans. Wholesale price for lobster has dropped from $6 a pound in 2005 to $2.20 a pound in 2009. I can attest to this. Coming from New England, one of my favorite activities in the past few years when visiting home has been a trip to the local supermarket, where fresh live lobsters are often priced lower than chicken (note: lobster does not taste like chicken). But, though lobsters at the market are now at record low prices, lobsters at the restaurant are still very expensive.
Behavioral economics teaches us that people are not rational actors. Instead, we use heuristics and cognitive processes to simplify decisions, and often view the world in very non-rational ways based on how our minds work and how situations are presented to us. In keeping lobsters pricy, restaurants have considered and applied some key behavioral economics principals:
- Irrational Value Assessment: People don’t really have a strong understanding of what the value of something should be. Value and price, rather than a pure product of supply and demand, can be much more complicated. The Irrational Value Assessment principal tells us that people rate the quality and their enjoyment of a product higher if it costs more. So, by keeping restaurant lobster priced high, restaurants are attempting to tell consumers that “lobster is still king”.
- Dominated Alternatives: Value and price are also strongly influenced by context. What alternatives are available, and how might they be priced? People tend to purchase “medium”. At a restaurant, lobster is often the most expensive thing on the menu. Having this high priced item on the menu means that what might look like a very pricy piece of fish, is now reasonable in relation to the lobster dish.
What Can Market Insights Professionals Learn From This?
Firstly, now is the time to head to the supermarkets and fish markets of New England and buy yourself a lobster, or many lobsters. But also, behavioral economics is an important tool to making smart, profitable decisions. If we understand some of the mental processes that consumers use when evaluating products and making purchasing decisions, we can turn these into value for our companies with recommendations like “keep lobster expensive!”.
CEB’s Market Insights Leadership Council is currently conducting research on behavioral economics and how we can apply it to insight generation activities. Stay tuned this fall as we roll out a whitepaper and toolkit to help you understand and apply a range of behavioral economics principals to market insights activities.