Many social programs focused on improving health in developing countries require active participation .Unlike a one-time vaccine, products ranging from condoms to insecticide must be used regularly in order to have any health benefit. The crucial role of household behavior in making such products work has led practitioners to search for new ways to ensure regular use among households receiving much-needed health products.

Shapiro went to Zambia to study these issues in the context of the sale and usage of Clorin, a home water purification product. Two distinct effects were studied. First, does charging a higher price target distribution at those who are willing to pay more because they intend to use the product more? Second, does the act of paying more itself induce people to use the product more, due to the sunk cost effect, which might cause people to psychologically justify the purchase price through increased use?

In order to study whether charging more for Clorin results in greater use, the authors designed an experiment that would separate two effects of prices on product use. On the one hand, charging a higher price may help target distribution of the product to those who intend to use it most. On the other hand, the act of paying—or the amount paid—may exert a direct influence on use if households feel they must use a product to make the best use of the money they spent. These two effects—which the authors respectively call the “screening” and “psychological” effects of prices—combine to determine the effect of prices on product use.

The authors find strong evidence that higher prices screen out less intensive users of Clorin. For a given transaction price, increasing the offer price by 10 percent results in a 3.6 percent increase in reported use among buyers.

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Put differently, the authors find that the screening and psychological effects allow a firm or government to achieve the same level of Clorin use while charging a higher price. This, in turn, means that the Clorin program can produce greater revenue, which can in turn be reinvested in advertising to promote use, or can be redirected to other valuable social programs.

Understanding how these effects work will be very important for organizations looking to maximize the effectveness of their public aid and wondering how much to charge for the services they provide.

Understanding the screening and psychological effects of prices is critical to resolving public policy debates over the appropriateness of user fees for access to social products and services.

Ashraf, Berry, and Shapiros findings have important implications for economics and psychology, as well as for private and public sector industries in which product use is an important consideration.

“Our findings offer a new way to think about the pricing controversy,” says Shapiro. “Charging higher prices for health products does have an obvious downside, which is that fewer people will get access, but the benefit is in targeting the distribution of the product to the people most likely to use it, as well as greater revenue for social programs. These issues need to be weighed against each other when making policy decisions about setting prices.”

Watch the video at the link below to hear Jesse describe his research in Zambia. He also discusses applications to media and advertising, in particular the question of whether giving a publication such as a newspaper away for free induces people to pay less attention to it, thereby reducing the value the audience has to potential advertisers.

Read more: The Economics of Pricing: Can Higher Prices Stimulate Product Use?