Smart Money Buys Brand X
At CVS, a 100-tablet package of store-brand aspirin costs you $1.99. Bayer aspirin is three times that much. Nonetheless, millions of people end up buying Bayer. When it comes to headache remedies, salt, sugar and hundreds of other important products, many people choose national brands even when a cheaper store brand is at hand. Why?
For the first time, we have solid answers, thanks to a study by Dutch economist Bart Bronnenberg of Tilburg University and three colleagues from the University of Chicago. They found a simple correlation: The more informed you are, the more likely you are to choose store brands. Pharmacists, for example, are especially likely to buy store brands of headache medicines. Chefs are far less inclined to select national brands of salt and sugar than are nonchefs who are otherwise demographically identical. In other words, national brands are succeeding largely because of consumer ignorance.
To test whether a lack of information is responsible for consumers' choices, Bronnenberg and his co-authors compared a range of consumers who shop in the same markets and chain stores during the same time periods. They used both indirect and direct measures of how well-informed the shoppers were about headache remedies. The indirect measures included occupation and education. The direct measures came from shoppers' responses to questions about the active ingredients in headache remedies. There was a close connection between the indirect and direct measures: The average person accurately answered the ingredient question 59 percent of the time, but that figure rose to 85 percent for registered nurses and to 89 percent for pharmacists.
Using purchase data on more than 77 million shopping trips from 2004 to 2011, the authors matched consumers' actual choices to their knowledge and professions. Pharmacists bought national brands only 8.5 percent of the time, while the average consumer bought them 26 percent of the time. People lacking a college education were especially likely to buy national brands. On the other hand, health-care professionals -- including nurses and doctors -- were more likely to buy store brands than lawyers, who don't have relevant expertise.
In the case of pantry staples (salt, sugar, baking soda and the like), national brands accounted for 40 percent of total sales volume. But among chefs, the share dropped to just 23 percent -- the smallest for any other occupation.
It's interesting that health-care professionals show no special interest in buying store-brand salts, sugars or baking sodas; for those products, their choices look a lot like most other consumers'. And while chefs do show a preference for store-brand headache remedies, it's not nearly as great as that of health-care professionals. For the most part, people's knowledge is domain-specific.
Bronnenberg and his co-authors tell the same basic tale for other health products, including cold remedies, bandages, vitamins and contact-lens solutions. Knowledgeable consumers tend to choose store brands. The effects are smallest for first-aid and eye-care products -- which suggests that informed consumers might find genuine differences in their quality.
If all consumers were better-informed, then, consumer markets would look very different. Total expenditures on headache remedies, for instance, would fall 13 percent, and retailer profits would rise 5 percent as people bought more in-house brands. And if people bought store brands whenever they could, they'd save as much as $44 billion.
It is the least informed consumers who are the most likely to waste their money. Unfortunately, many of them have little money to waste. One implication is clear: Stores ought to be doing a lot more to help people recognize their potential savings.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Cass R Sunstein at firstname.lastname@example.org
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