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Consuming Issues: How prices can play tricks with our brains

You know what it's like: you're wandering around the supermarket and you see the cut-price wine on the aisle ends: "Was £7.99, now £3.99." Like many shoppers, I wonder how a shop can afford to halve the price, and whether the original price can have been genuine.

And then I think: "Still, it's probably a decent bottle, and it must have been priced at £7.99 for 28 days, otherwise trading standards would come calling and, this being a big grocery chain, they wouldn't want that, would they?"

Then I place the wine in the trolley. When I get it home, it tastes better than I would expect – not worth the original price, perhaps, but better than £3.99, and I quietly congratulate myself for picking up a bargain.

I'm sure I'm not the only one who likes knocking a few pounds off off the bill, especially at Christmas. As fir trees bring evergreen foliage to homes from the Scillies to Shetland, the shops are rammed with people taking advantage of half-price or "three for the price of two" offers. Lately, the Office of Fair Trading has been wondering whether these deals are a bit of a rip-off.

Last week it published an investigation into sales tactics commonly used by retailers and listed seven. Some of them are relatively new, such as "drip pricing", where fees are added during the transaction, and "partition pricing", where the price is split into parts, making it hard for the public to make comparisons. Another ploy is complex pricing, commonly used to bundle up broadband, TV and telecom packages.

More traditional ruses are "bait" pricing where a cheap item lures shoppers through the doors, free and volume offers and that old favourite, "time-limited" offers which keep on getting extended. Another is "reference pricing", where products are marked down from the "orginal" price.

The OFT said that while all these tactics could be used legitimately, often they were not; and misleading practices were growing, spreading from the internet to the high street, damaging fair competition and costing shoppers "billions of pounds a year".

What was most interesting, though, was not that the OFT found there were dodgy offers – because shoppers are not fools – or that they were growing, but their effectiveness. To gauge the impact of "price framing," the OFT comissioned seven research projects including pyschological tests in laboratory conditions and interviews with 3,000 people in their homes.

And the upshot was this: We're all suckers for a bargain. Even "numerate" mathematicians and statisticians exaggerated the worth of items because of the ploys.

One of the easiest, most common and successful is the last I mentioned, "reference pricing". In an experiment, the OFT made up an outlandish "was" price ("the reference price"). Some 75 per cent of participants thought it was genuine, leading few to shop around for better deals. Even among people who thought a half-price offer was suspect, 87 per cent still wanted to check it out in case it was a bargain, according to the report, Advertising of Prices.

Looking at the "emotional reaction", the business regulator discovered something even more surprising: "Whilst it is clear that reference pricing may affect consumers' transactional decisions, it is less evident that consumers are annoyed or angered by this practice."

The reason lies deep in our psychology, according to Philip Graves, a behaviour consultant whose clients have included ITV, Comet, Camelot, Hotpoint, Whirlpool and Pepsi, and who has just written a new book, Consumer.ology.

What we buy, he says, often has nothing to do with what we consciously think about a product, but is rooted in our unconscious minds. Companies, he advises (though I suspect a lot of them know this), should ignore ordinary market research conducted in artificial conditions and concentrate instead on what's going on inside our heads as we walk around a supermarket, clothes shop or restaurant.

Looking at "triggers of desire", he writes (presciently given his book was published before the OFT report): "The price label on an item can prime expectations and alter how people actually experience things."

He recounts an American experiment in which researchers asked people to rate a series of wines which they were told had different prices, even though all the wine was identical. The participants consistently gave higher ratings to the wine they had been told was more expensive.

Intriguingly brain scans conducted during the experiment revealed the area believed to be responsible for encoding pleasure from taste and smell became more active when the "more expensive" wine was being tasted. In other words, not only did the higher reference price make goods more attractive, people enjoyed them more too.

So retailers make us spend billions of pounds more than we should by cunningly exploiting our psychological weaknesses. Fair competition is being distorted, honest traders penalised, markets are not working effectively. The OFT has put retailers "on alert" that they will be targeted if they mislead consumers.

But, you know, I hope they leave those supermarket wine offers alone. I'm no oenophile but I'm convinced those discounted wines taste better than an ordinary £3.99 bottle.