The Credit Card Premium. How Much More Are We Paying?

by The Happy Rock on July 6, 2007

Duncan Simester created one of the first experiments that attempted to directly test how consumer’s ‘willingness to pay’ is affected by credit cards. In this experiment 1st year MBA students were instructed to provide a sealed envelope with the amount that they would be willing to pay for sold out Celtics and Red Sox tickets. One set of instructions required cash payment and the other a credit card payment. In both cases the face value of the tickets were not given. The prize was to be sold to the person who wrote down the highest price, but sold at the second highest price. This system was designed to extract the participant’s true ‘willingness to pay’.

boston_red_sox_tickets.jpgThe results were no less then surprising. Consumers were willing to pay 133% more for the Celtics tickets, and 76% more for the Red Sox tickets when using credit cards.

One of the suggested reasons is that consumers use different anchoring points to assess value. In one case the amount of cash the person has on them or in their account is probably used, and in the other the credit limit or remaining credit is probably used. Although the reason isn’t fully known, that shouldn’t really matter to the frugal spender. What matters is that there is such a thing as a ‘credit card premium’ and we need to be aware of it.

Has anyone noticed whether this is true in their own lives?

Source – Note the experiment was administered at a time when the Celtics were a playoff contender.

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