Of course one of the main questions that comes from this is about the use of generic drugs.

Is it possible that the mere fact that drugs have no branding or nice container (and are cheaper) can reduce the expectations we have from the drug and hence its efficacy?

I suspect that this is the case and that i we want t control both the cost and quality of medicine we need to do something about it.

What can we do? Imagine for example i we could increase the expectations of generic drugs and not position them in the market as cheap knock-offs but as well tested and high quality medications. For example, what if the Mayo Clinic started approving well tested medications that have been moved into being generic.

I am not sure about you but I suspect that if I took the Mayo Clinic Aspirin or blood thinner I would feel much betetr.

This also seem to be interesting implications for ubiguity as well as price. If the wine price stays the same, but it becomes more common for everyone to drink $200 wine, does it have the same loss of physical effect? Does the awareness and maybe salience of the availability of better, higher priced goods ruin the fun. Does the increasing pervasiveness of $100,000 cars take the fun out of all $50,000 ones? And does knowing there are $500,000 or $1,000,000 Ferraris take the fun out of a $250,000 one? Seems like a trivial question given the number of folks concerned about Ferrari purchases, but what about a $65,000 luxury car? As the wealth of populations increases, and new high end goods are offered to get beyond "mass affluence" do these new higher priced goods physically take the pleasure out of the lower priced ones? How much can the very creation of new luxury destroy the fun of the old, not just emotionally but in the very chemistry of the brain? Interesting.

Paul, your questions are right on. It also turns out that call girls are on top of the issue.

In this Sunday's New York Times ("The Double Lives of High-Priced Call Girls," 3/16) a call girl named "Ava Xi'an" shared her placebo pricing secret with the reporters. "When someone pays her $1,250 an hour, he gets exactly what he would for $200, her rate when she started out," the reporters wrote. "The difference is psychological, she explained: 'The more somebody pays for you, the more they’ll respect you.'”

She went on: "Tell a guy you’re $100 and they’ll treat you one way — tell them you’re $1,500 and they’ll treat you better....I’ve heard a lot of girls saying, ‘Is this girl getting $5,500 an hour because she’s more beautiful? Is she doing something I don’t?’ The answer is no. But that girl is able to look a guy in the eye and say, ‘This is what I’m worth, and this is what you have to pay if you want me.’ And you have to be able to do that, and believe it.”

Dan, you mentioned to me that the secret of placebo pricing is in its -- secret. Once everyone is wise to the game, then the game is over. No one will want to buy anything over a certain price if they all find out that they're being hoodwinked. I suppose that goes for call girls, too.

I have noticed myself experience this phenomena many times. If I am wearing nicer clothes or eating at an expensive restaraunt, then I somehow feel more important. (even though I have to balance it out by eating frozen dinners for a little while until the account recovers) A Tiffany's diamond comes from the same ground that all other diamonds do, but for some reason it sparkles a little more and therefore must be better. I am sure Mother Earth was conscious of those particular diamonds durng the millions of years of incredible pressure she placed on the coal.

To what degree is the average consumer susceptible to this placebo effect? I would think the intensity of the effect increases proportionately to that of disposable income. While I admit the effects of this phenomena, I still am a value oriented consumer and try to tame the emotional purchases I make. I am convinced that there is a neural response to spending more. Part of it might just be trying to justify the purchase as much as it is think the drug will work or the wine tastes better.

It seams there is likely a dangerous middle ground when playing the "expensive enough" game. Crossing that threshold into the land of premier vineyards and namebrand drugs, can be scary. While price does not ensure a good cabernet or a quick fix for arthritis, you better make sure you are pretty enough.

Pricing is one of the factors that influences the impact of sales, and I don't consider it useful to evaluate it independently of the other factors related to consumption.

The article's observation seems interesting, and it's good to bear in mind [partly for the political aspect of decision making] about costs in the company.

A very interesting blog post and the replies too, especially the call girl's perspective. It reminds me of the story of an Australian dentist, Paddy (who has been quoted in so many of the books I read) who was overworked and stressed. He got sick and tired of his clients that he decided one day to up his fees and just service a select clientele. He thought his business earnings would drop. But shockingly, his earnings went up because everyone clamoured to be his patient! Why? Was he better at extracting teeth? Better at fillings? No. He just made himself highly exclusive (it helped he sent out a letter to all his patients announcing he was no longer available to all and sundry but only to a few patients). Just like why we'd buy a Tiffany diamond instead of something cheaper. Exactly like what the call girl said. The point of difference is the value. And how does one show value? In all good marketing, there's a story to be told. Tell the story well enough and you can justify your prices (after all, price is never the factor anyway).