The “Euro Illusion”: Illusion or Fact?

The changeover to the euro elicited an upsurge of research on the effects of the new currency on consumers’ conversion strategies, price estimates, price evaluations, choices, and purchases. This research includes longitudinal surveys, interviews, and controlled experiments, both natural and in the laboratory. The present article starts with an overview of this research after which it more specifically focuses on research showing an influence of the nominal value, as expressed in different currencies, on price evaluations and consumer choice. For most countries, the transition to the euro led to a lower nominal value currency. A bias known as the “euro illusion” has been documented such that the subjective value of money is influenced in the direction of the nominal value (i.e., in most countries prices and salaries seem smaller when expressed in euros than in the old domestic currency). Although the term was coined in connection with the euro changeover, the nominal representation of a currency has been shown to influence the subjective value of money in unfamiliar currencies other than the euro. Thus, tourists travelling abroad may frequently be subject to such an illusion. Different mechanisms have been proposed to account for the euro illusion. One is the numerosity heuristic and another the anchoring-and-adjustment heuristic in conjunction with biased conversion strategies. The size of the euro illusion is influenced by trade-offs between accuracy and effort. Consistent with this hypothesis, task importance, time constraints, familiarity with the conversion strategy, complexity of the conversion strategy, mood, and attitude towards the country or the currency all influence the size of the euro illusion.     

Consumer Adaptation Strategies: From Austrian Shilling to the Euro

On 1st January 2002, in 12 countries of the European Union, euro notes and coins replaced existing national currencies. The currency changeover required citizens to adapt in various ways. They had to learn to handle new coins and notes, and evaluate prices in the new currency. Data on how these tasks were performed by Austrians are presented. In particular, Austrian consumers applied four different strategies to establish price intuition for the euro: a conversion strategy, an intuitive strategy, an anchor strategy, and a marker value strategy. Data on these strategies show that their application varies across socio-demographic characteristics, differs with purchase situations, relates to euro attitudes, and changes over time. Although the introduction of the euro took place about 5 years ago, the adaptation process is still ongoing.     

Consumer price knowledge before and after the euro changeover

This article examines how the price knowledge of Finnish consumers has changed since the adoption of the euro. Our study measures price knowledge by comparing consumers’ price estimations with actual market prices at two points in time: before (October 2001) and after (March 2002) the changeover to the euro. Furthermore, we study potential differences between three different age groups. We approach the issue using four determinants, namely (1) response percentage (the percentage of respondents who were able to give a price estimate); (2) the difference between the median of the market prices and the median of the price evaluations; (3) the difference between the average of the market prices and the average of the price evaluations; and (4) the average of the absolute deviations between the average of product prices and consumer price evaluations. Our results indicate that, on average, consumers know the prices of grocery products quite well despite the prevailing dispersion of actual prices in the market. Price knowledge was found to be rather good both before and after the introduction of the euro. Nevertheless, the good price knowledge after the changeover was probably because consumers remembered the prices asked in the old currency and converted them to euros. The majority of respondents were able to give price estimates that were within the range of actual price dispersion in stores. The results also show some deterioration in price knowledge after the advent of the euro. There was variation between different age groups, and it seems that the introduction of the euro has affected various groups differently. Consumers aged 30–50 years knew prices best both before and after the euro, whereas the ability to estimate prices had declined most among consumers above 50 years after the euro changeover.     

Interaction effects of mood induction and nominal representation of price on consumer choice

The transition to the euro in several European countries causes consumers to make mistakes in economic transactions. One mistake referred to as the “euro illusion” is the tendency to evaluate prices on the basis of their nominal representation, thus overestimating or underestimating how expensive products are. Investigating effects of the euro illusion on consumer choice as well as moderating effects of mood, three laboratory experiments were conducted employing convenience samples of students. In Experiment 1 a bias toward the nominal representation was demonstrated when participants chose an unfamiliar (fictitious) large-unit currency (small numbers) for paying the price of a consumer product but chose an unfamiliar small-unit currency (large numbers) for obtaining a salary. The bias was larger for participants who were induced to feel positive and deactivated (calm and relaxed) than for participants who were induced to feel negative and activated (anxious and jittery). The difference in frequencies of choice of currency were replicated in Experiment 2. No effects were, however, found of natural mood assessed by self-report ratings. In Experiment 3 choices of more expensive consumer products with additional features were more frequent when the prices were expressed in the large-unit currency than when expressed in the small-unit currency. Neither in this case did self-reported natural mood affect the choices.     

The Euro Illusion in Consumers’ Price Estimation: An Italian–Irish Comparison in the Third Year of the Euro

The euro illusion is a transient phenomenon that consists of currency-related asymmetries in the intuitive judgment of product prices made by consumers. The results of a cross-country study in the third year after the introduction of the euro show a strong price estimation asymmetry in a country with an extreme exchange rate (Italy) and a weaker effect in a country in which the nominal values of the new and the old currency are much closer (Ireland). These results rule out proposed explanations of the euro illusion in price estimation that assume the sole influence of plausible anchors (reference prices stored in memory within the plausible price range), supporting instead accounts also endorsing the role of implausible anchors (reference prices outside the plausible price range). Beyond contributing to our theoretical understanding of the euro illusion, this research starts to unveil the interplay between structural factors (i.e., the currency exchange rate) and psychological mechanisms that produce long-lasting difficulties for consumers after a monetary changeover.

Price developments after a nominal shock: Benford's Law and psychological pricing after the euro introduction

Retail managers use psychological pricing to make the prices of goods appear to be just below a round number. The euro introduction in 2002, with its various exchange rates, distorted existing nominal price patterns while at the same time retaining real prices. We studied consumer prices before and after the introduction of the euro by using Benford's Law as a benchmark for price adjustments. Results indicate the usefulness of this benchmark for detecting irregularities in prices, and a clear trend towards psychological pricing after the nominal shock of the euro introduction. In addition, the tendency towards psychological prices results in different inflation rates in dependence of the price pattern.     

Development of Finns’ price knowledge after the changeover to the euro

This longitudinal study examines the 2002 changeover to the euro in Finland in order to find out how long it takes consumers to learn grocery prices in the new currency. We are especially interested in the influence of age on the process. We used price estimate data and market price data, with six data-collection points over 5 years, the first one just before the changeover and the last one 5 years after it. As expected, consumer price knowledge was clearly weaker immediately after the changeover than during the era of national currency. However, it has not improved significantly in 5 years. The probable reasons for the decreased price knowledge are the diminution of nominal values brought by the changeover (1 euro equals approximately 6 Finnish marks) and general indifference to prices, especially low ones, brought by the increasing standard of living.     

Illusory Price Increases after the Euro Changeover in Germany: An Expectancy-Consistent Bias

The aim of the present report is to review research demonstrating the role played by expectations for observed illusory price increases after the euro introduction in Germany. In laboratory experiments when participants are asked to estimate price changes in a restaurant following the euro introduction, the price estimates are found to be biased in the direction of the expectation of rising prices. The research also examines the extent to which a similar judgment bias is evident in other areas and how interventions counteract the bias. A further focus of the research is on the underlying process. In this respect the results show that the bias is based on a selective outcome correction process not previously described. Theoretical implications and practical implications for consumer policy issues are highlighted.

The currency denomination of exports — A questionnaire study

We report survey results on the currency choice of a random sample of Swedish exporters. We find that for an overwhelming share of exports, the price, invoice and settlement currency is the same. The currency of the customer is the most used, with Swedish kronor and vehicle currencies accounting for approximately equal shares. Currency choice is similar for intra-firm and between-firm trade. We also find that negotiations are important for both the price and for the currency choice. A minority of firms use posted prices for their main exports — the median price adjustment for those firms is once per year.     

Consumer responses to characteristics of price-matching guarantees: The moderating role of price consciousness

The present study develops and tests a conceptual model of consumer response to different types of price-matching characteristics (i.e., refund depth, length, and scope) across consumer segments with varying levels of price consciousness. A computer shopping simulation results show that a deep refund is interpreted as a signal of low prices by nonprice conscious consumers. However, price conscious consumers are found to associate deep refunds with increased prices, an unintended outcome for the retailer. The effects of price-matching characteristics on search and purchase behavior were also found to vary across more and less price conscious consumer segments.     

Intraday price‐reversal patterns in the currency futures market: The impact of the introduction of GLOBEX and the euro

This article assesses the intraday price‐reversal patterns of seven major currency futures contracts traded on the Chicago Mercantile Exchange over 1988–2003 after 1‐day returns and opening gaps. Significant intraday price‐reversal patterns are observed in five of the seven currency futures contracts, following large price changes. Additional tests are conducted in three subperiods (1988–1992, 1993–1998, and 1999–2003) to examine the impact of the introduction of electronic trading on GLOBEX in 1992 (to assess how a near 24‐hour trading session might impact the next‐day opening and closing futures prices) and the introduction of the euro in 1999 (to assess its impact on price predictability in other futures markets). It is found that the introduction of the GLOBEX in 1992 significantly reduced pricing errors in currency futures in the second subperiod, making the currency futures markets fairly efficient. However, the introduction of the new currency, the euro, and the disappearance of several European currencies in 1999, resulted in significant price patterns (mostly reversals and some persistence) in most of the currency futures, indicating inefficiencies in the third subperiod. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1089–1130, 2006     

Does Euro or Dollar Pegging Impact the Real Exchange Rate? The Case of Oil and Commodity Currencies

The aim of this paper is to investigate the equilibrium exchange rates for commodity and oil currencies as well as the discrepancies of their observed exchange rates to these equilibriums. To this end, first, we estimate a long‐term relationship between the real effective exchange rate and economic fundamentals, including the commodity terms of trade. The estimation relies on panel cointegration techniques and covers annual data from 1980 to 2007. Our results show that real exchange rates co‐move with commodity prices in the long run and respond to oil price somewhat less than to commodity prices. Second, we assess the degree of misalignment of these currencies, as the gap between their observed exchange rate and the estimated equilibrium exchange rate. We show that these misalignments are not significantly related to the exchange rate regimes adopted by the countries, either pegged or floating. However, for pegged currencies, the size of misalignments significantly depends on the anchor currency, either the euro or the dollar. A comparison of misalignments of pegged commodity and oil currencies across different periods confirms these results: during periods of dollar (euro) overvaluation, currencies pegged to the dollar (euro) tend to be overvalued; the reverse being true when the dollar (euro) is undervalued. Consequently, pegged currencies are often driven away from their equilibria by wild fluctuations in the key currencies, on which they are anchored.     

Investigating first‐stage exchange rate pass‐through: Sectoral and macro evidence from euro area countries

In this paper, we evaluate the first‐stage pass‐through, namely the responsiveness of import prices to the exchange rate changes, for a sample of euro area (EA) countries. Our study aimed to shed further light on the role of microeconomic factors versus macroeconomic factors in influencing the extent of the exchange rate pass‐through (ERPT). As a first step, we conduct a sectoral analysis using disaggregated import prices data. We find a much higher degree of pass‐through for more homogeneous goods and commodities, such as oil and raw materials, than for highly differentiated manufactured products, such as machinery and transport equipment. Our results confirm that cross‐country differences in pass‐through rates may be due to divergences in the product composition of imports. The higher share of imports from sectors with lower degrees of pass‐through, the lower ERPT for an economy will be. In a next step, we investigate for the impact of some macroeconomics factors or common events experienced by EA members on the extent of pass‐through. Using the system generalised method of moments within a dynamic panel‐data model, our estimates indicate that decline of import‐price sensitivity to the exchange rate is not significant since the introduction of the single currency. Our findings suggest instead that the weakness of the euro during the first 3 years of the monetary union significantly raised the extent of the ERPT. This outcome could explain why the sensitivity of import prices has not fallen since 1999. We also point out a significant role played by the inflation in the Eurozone, as the responsiveness of import prices to exchange rate fluctuations tends to decline in a low and more stable inflation environment. Overall, our findings support the view that the extent of pass‐through is comprised of both macro‐ and microeconomic aspects that policymakers should take into account.     

Effects of shopping information on consumers’ responses to comparative price claims

This article describes three studies that examine the effects of shopping information on consumers’ responses to comparative price claims in retail advertisements. Results of the studies show that 1) the opportunity to shop across retail stores reduces the effect of comparative price claims on consumers’ estimates of lowest price for a particular item, but has less impact on their estimates of the store’s regular price; 2) access to advertising from competing retailers has the same pattern of effects; and 3) across exposure to a series of ad claims, these effects generalize from estimates of specific item prices to judgments of the store’s general pricing. For branded shopping goods, the results show that comparative price claims may prove counterproductive for retail advertisers by leading consumers to believe that the store’s regular prices are high without convincing them that its sale prices are low.     

Euro Stories: The Irish Experience of Currency Change

This paper presents an overview of an interview study carried out in the Republic of Ireland approximately 1 year after the introduction of the euro in January 2002 and also compares the Irish experience to that of the other initial Eurozone countries. The new currency seems to have been rather more positively received in Ireland than elsewhere. Irish adults had a generally more positive attitude towards the new currency and seemed to have adapted to it rather well. Nevertheless, they shared some common experiences and problems with citizens of other countries, such as the perception that the introduction of the euro raised inflation more than it actually did, confusion of notes and coins and the use of coping strategies involving price conversion to the former currency. The implications of the Irish experience for policy are discussed.     

Online Price Search: Impact of Price Comparison Sites on Offline Price Evaluations

Consumers increasingly rely on Internet price comparison sites (PCS) to gain knowledge about the market. The prices generated by a PCS search can act as contextual reference prices and influence the attractiveness of prices encountered later as consumers shop offline at local stores. This paper demonstrates that both PCS retailer ratings and the shape of the PCS price distribution influence the impact of PCS search results on later price evaluations. A favorable PCS retailer rating increases the perceived validity of the price associated with that retailer, enhancing the impact of that PCS price on offline price evaluations (Study 1). The shape of the PCS price distribution can also influence later price evaluations, however this effect depends on the information provided by the PCS retailer ratings. When PCS retailer ratings are similar, implying similar validity for the associated prices, low PCS prices and those appearing more frequently in the PCS price distribution have more impact (Studies 2 and 3). When PCS retailer ratings are variable (some high and some low), the PCS price distribution effect occurs only when the PCS retailer ratings provide congruent information about price validity — that is, the most frequent price is offered by retailers with more favorable ratings. Study 3 shows that price validity inferences do mediate this result. Finally, we depart from the offline shopping context to show that when consumers choose a retailer directly from the PCS search results, the effect of PCS retailer ratings is stronger for high-priced retailers and for consumers who rely less on the retailer price as a heuristic to infer retailer service level. Based on our findings we offer insights for online and offline retailers when considering strategic responses, such as price matching guarantees.     

Price discovery in the foreign exchange futures market

Examination is made of the relative contributions to price discovery of the floor and electronically traded euro FX and Japanese yen futures markets and the corresponding retail on‐line foreign exchange spot markets. GLOBEX electronic futures contracts provide the most price discovery in the euro; the on‐line trading spot market provides the most in the Japanese yen. The floor‐traded futures markets contribute the least to price discovery in both the euro and the Japanese yen markets. The overall results show that electronic trading platforms facilitate price discovery more efficiently than floor trading. Futures traders may also extract information from on‐line spot prices. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1131–1143, 2006     

The Accuracy of Scanned Prices

Nearly all retailers use price scanning systems to process transactions quickly, and presumably, accurately. Inaccuracies in scanned prices have important implications for retailers in that undercharges may impact retail profitability while overcharges could result in negative consumer perceptions of retailers and continued legal action. Here, we investigate the overall State of accuracy of scanned prices and develop certain empirical generalizations. To do so, we begin with a review of what is known regarding the accuracy of scanned prices and conduct a reanalysis of FTC data and compare the results with those from more recent cross-sectional data from the State of Washington. We then conduct a thorough analysis of a large longitudinal price scanner data set, with 231,760 products screened over a 15-year period. We investigate accuracy across different retailer characteristics, merchandise locations, and promotional activities. Implications of these results for retailers are discussed.     

Price Font Disfluency: Anchoring Effects on Future Price Expectations

Novel, unique, or otherwise disfluent fonts are often used to draw consumer attention. However, disfluent fonts may also create metacognitive processing challenges. Therefore, consumers may devote more cognitive resources to process disfluent price fonts and will consequently be more likely to accurately recall and anchor on disfluent price displays when forming their future price expectations. Three experiments demonstrate that disfluent sale prices can reduce future price expectations, while disfluent manufacturer-suggested retail prices (MSRPs) can increase future price expectations. Additionally, price recall accuracy mediates the effect. Moderation analysis demonstrates that disfluent MSRP displays are more likely to affect price-conscious and less-involved consumers.     

How price complexity takes its toll: The neglected role of a simplicity bias and fairness in price evaluations

Marketing managers commonly employ complex price plans. Surprisingly, limited and conflicting evidence reports how customers perceive and react to complex prices. This study examines perceptions about price complexity and shows that customers tend to prefer simple prices. Two experimental studies show that perceived price complexity negatively affects customer perceptions of price fairness and influences product choice because customers negatively evaluate the transparency of the firm's pricing practices and infer higher total prices. Customers comparing alternate offerings may therefore prefer simple over complex prices, even when the latter are less expensive. Study results suggest limiting price plan variations positively affects customer inferences about transparency and fairness, and thus customer choice.