Freakonomics Radio - 178. How to Save $1 Billion Without Even Trying

Episode Date: September 11, 2014

Doctors, chefs, and other experts are much more likely than the rest of us to buy store-brand products. What do they know that we don’t?

We recently held a peanut butter and jelly sandwich taste test here at WNYC where we record our show. So guys, this is for an episode about premium brands versus store brands. And so what you see here is two rows of sandwiches, one on a plain white plate there and one on the bordered plate there okay and the sandwiches were made with either the premium skippy creamy and the smuckers strawberry preserves so any nut allergies or verbal waivers if you die not our problem there's a lawyer in the room there's a lawyer it'll be fine that's good good lawyer and then the the the store brand sandwiches are ShopRite peanut butter creamy. They put their adjective last, peanut butter creamy. And strawberry preserve, ShopRite.

And the bread is identical. It's bimbo. So really, all we want is for you to eat one of each and tell us which one you prefer and why. Pattern plate is the one. Tastes nuttier. to eat one of each and tell us which one you prefer and why. Pattern plate is the one. Tastes nuttier. More honest stuff in this one.

Yeah, less sugar. A little more texture. More texture and therefore better or therefore worse? I like a little texture, so I'm going to say better. I liked the border and I thought it was the premium band. I liked the border, and I thought it was the premium band. I liked the border one for whatever reason. It just tasted slightly more delicious, and it makes me think that was the Skippy.

So how would you feel collectively if I told you that they were just all the same and that they were all the generic and that there was no difference at all on the plate? I would call you a liar. And you'd be right. Okay, so here it is. From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything.

Here's your host, Stephen Dupner. We try not to lie too much around here, but yes, in the interest of science, we did tell a lie about the peanut butter and jelly sandwiches. They were all made with the same store brand ingredients. None were made with the Skippy peanut butter or Smucker's preserves. And yet, as you could hear, most of our tasters were pretty sure the two sandwiches were quite different and they knew which one they preferred, which one was better, even though neither of them was better.

Now, why'd we do this? The idea was to get all of us thinking about the consumption choices we make, how meaningful they are for us as individuals, and for the overall economy. We have a couple of economists to walk us through this. I am Jesse Shapiro. I am an applied microeconomist. Anything else you want to know? And that's that.

And that's that, damn it. Yeah. Where do you teach? I am a professor of economics at the University of Chicago Booth School of Business and a visiting professor of economics at Brown University. Oh, very good. Okay, Matt? Yeah, I'm Matt Jensko.

I'm also a microeconomist. I'm a professor of economics at the University of Chicago Booth School of Business. And I want to talk to you today about a working paper called Do Pharmacists Buy Bear? Bears and the Aspirin, Informed Shoppers and the Brand Premium. So in order to get that very dramatic question out of the way, do pharmacists buy bear or are they more likely to buy the generic aspirin? Pharmacists don't buy bear. That was easy. Okay. And what about going outside of the domain of pharmacists and headache medicine? What about other experts in their domains?

And do they tend to buy store brand versus premium brand? Well, first of all, if you look at health experts outside of headache remedies, you see this pattern in a lot of products, especially medications, over-the-counter medications. You see that people who are informed about the products and who are occupational experts, they're way more likely to buy store-bought across a lot of categories. Outside of the health domain, we took a look at pantry staples, things like table salt and sugar, and it turns out that chefs are considerably more likely than non-chefs to buy store-bought salt, sugar, baking soda, things like that. Okay, so this is the kind of research that I think is of great interest to most people, and yet would lead many of those most people to say, wow, really? This is what economists at University of Chicago spend their time doing is figuring out a pharmacist by bare aspirin.

So let's assume that beyond that very narrow question, there's a great broad answer or a great broad line of thought that you're trying to pursue. What are the questions you're trying to answer really when you do a study like this? Yeah, I think that's a good way to introduce it because this is a paper we think of as some really simple facts that speak to a big, old, and to us kind of important set of questions. So the set of questions in the background is, what is advertising and branding and all this stuff that companies spend so much effort on really about? Is it fundamentally about trying to inform consumers, help them make good decisions, help them identify what are the best products so they can buy them? Or at the other extreme, as a lot of people have speculated, is it really about trying to confuse

people, cause them to make mistakes, convince them that stuff that really is not any better is, and get them to pay a lot of money for it? So that's something people have argued about for a very long time. We have some quotes in the paper from, you know, 50, 60, 70 years ago, people speculating, you knowulating. There's this branded soap flakes that people seem to pay a lot for instead of the really simple basic soap flakes, and both of them are just soap flakes. And so you wonder, why are people paying for this? Is it because there's something special about the expensive ones, or is it just that people are confused? And so having now these really large data sets where you can actually go look at lots and lots of people's actual purchases, as well as their occupations

and various other indicators of how sophisticated they are, kind of gives you new traction on an old question. Okay, so let's say you buy this argument for why this kind of question is meaningful. Assuming it is, how do you go about answering it? So I think stepping back, so I'll tell you in a minute how we did it. But stepping back, I think what we want to do is we want to follow somebody around the grocery store or the drugstore. And every time they make a decision between, say, a store brand, you know, CVS brand aspirin or a national brand, say Bayer aspirin, we want to ask, would that decision have been different if they knew more? That's really the question we want to ask. And we want to know that for every aisle in every store and for every shopper. And that's a very tough question to answer.

We don't have that, you know, hypothetical other more informed shopper standing next to them saying what they would do. So we need to go and find those counterparts in the data. So we started with a data set called the Nielsen Home Scan Panel. And this is a data set where people basically have a barcode scanner at home, and they record all of the purchases they make at supermarkets, at drugstores, at club stores, at mass merchandise stores, all the main kind of retailers. And that was great for getting a measure of, you know, the everyday person's purchases. Then we needed to find a way to identify these kind of informed counterparts for everybody. And so the way we did that is we ran two custom surveys in collaboration with Nielsen of the

HomeScan panelists. So we basically went out to them and asked them some questions. We asked people, what was their occupation? So what do they do for a living? And then we also gave people a quiz. We said, what's the active ingredient in Tylenol? What's the active ingredient in Advil? And we gave them multiple choice tests to see how they did. And so what we try to do then is we try to find people who have a similar age, home ownership, live in the same geographic area, shop at similar kinds of stores, but

differ in how much they know about the products that they're buying. And from that, we can try to construct a kind of data-driven answer to the question, how different would these choices be if people were better informed? And the thing that's really important is that that data set is really, really big. So relative to a lot of surveys and things, the Nielsen Home Scan Panel has, you know, tens of thousands of people in it. And that means that once you zero in on a particular occupation, like pharmacists or chefs, you still have lots of those people in the data. So almost any other traditional sources, one might have had surveys that ask consumers what they buy. It would have been hard to use for this because at the end of the day, you might end up with,

you know, three pharmacists and six chefs, and then you couldn't really figure it out. I see. Let's talk about the headache medicine or aspirin for a little while. You said that there would be some questions asked, multiple choice. How many questions were there, and can you recite them? And we'll let me and the listener play along to see if we have any idea what we're talking about. I think there were five questions. Okay. And I can ask you the question, but I don't know that I'll be able to remember all the multiple choices. Let me give it a try. Okay. Okay. So what is the active ingredient in Tylenol? Is it A, acetylsalicylic acid, B, acetaminophen, C, naproxen sodium, or D, ibuprofen?

Acetaminophen. Congratulations. Youroxen sodium, or D, ibuprofen? Acetaminophen. Congratulations. You nailed it. Thank you very much. You are a very informed shopper. That would put me in the informed realm already? Just one? That's one out of five.

And so then, you know, next question. Give us one more. Okay. This time, I'm not going to give you the multiple choices, though. Oh, man. I'm just going to ask you, what's the active ingredient in Advil? Advil is ibuprofen. Okay, there you go.

I could even do a leave. I could do a leave if I had to. Yeah, go for it. You'd be five out of ten. That's a naproxen something or other. That's right. Yeah, I know my pain medication, fellas. The multiple choices had a couple of, you know, they were like sodium chloride or something was tossed.

There were a couple of not-so-headache-remedy kind of things tossed into the multiple choices to mix things up. Okay, so those are the kind of questions you're giving to separate out how expert someone is in their domain, correct? Not how they know something about the product, correct? Yeah, we ask these questions of everybody. And so we think of them as separately from occupation. This is a separate measure of how much do people know about these

products? How sophisticated are they? It's going to be, we think it's going to be correlated with lots of general knowledge and sophistication. Not only do you know these active ingredients per se, but somebody who knows these active ingredients like you is also like a pretty smart, talented, sophisticated person who knows lots about lots of different kinds of things. And the idea being, if you know the active ingredient in the name brand thing, and then you look at the store brand thing and you say, oh, active ingredient is identical, you think, well, I should buy the one that's a third the price, right? That's the connection we're trying to make here, right? Basically, yeah. So I think there's sort of a

simple version of this and then a slightly more subtle version. The simple version is Tylenol and CVS brand are both acetaminophen. If you realize that, you would know they're the same thing, so you should buy the cheaper one. That's sort of the simple story. The more subtle story is even if you know that they're the same active ingredient, you might still be kind of worried about a variety of things. You might wonder, do they have different coatings? You might think, I heard that these store brands are manufactured in India and maybe these plants in India are not so good. I heard that there was like a recall of these products once upon a time when something went wrong with the manufacturing and they weren't safe.

So you could come up with a whole bunch of reasons why even if they're the same active ingredient, you might still want to pay a little bit extra for the fancier thing because maybe it's safer because maybe it has this coating that makes it work better. And so above and beyond knowing that they're the same active ingredient, you need some knowledge and sophistication to be able to assess, are all of those other differences things I should be worried about? Are they really different, first of all? And if they are different, should I care? And should I care to the tune of, you know, $3 every time I buy a bottle of this stuff? So we think of these knowledge measures

as picking up both, do you know the fact? And also probably they're correlated with, are you sophisticated enough to be able to make good judgments about those other characteristics? And what can you tell us about the reality of that? For all those factors that you just described, I know some people say that with generic pain relief medicine, they worry that the absorption rate or maybe the breakdown rate, I don't know what it's called,

in the body is different than that of the premium brand. So do you know much about or what can you tell us about the actual physical difference between a premium and a generic pain relief pill? It's hard to say completely for sure. But if you go to the FDA website, they'll tell you that store brand and national brand over-the-counter medications have exactly the same strength and composition and safety and efficacy as one another. But still, I think this is one of these topics that people get very worked up about. And so in going around and talking about this paper, we've met many smart academics, people whose judgment we respect, who have a different view of it and think, no, they're really, I buy Advil and there really is a good reason for that.

And so I think it's fair to say there's at least enough controversy that people can read the evidence different ways. There are certainly studies of prescription medications, for example, where it was shown that these absorption rates would differ or that the different coatings that they had actually affected efficacy. There certainly has been recalls and examples of safety problems. It's not at all clear whether those are any different for the, you know, Tylenol has had recalls, the brand, so it's not clear how different they are. But I think from my sense, at least talking to people, there's enough murkiness, just enough murkiness in the facts that people could come to different conclusions. And so that's, in a way, that's kind of where this study comes from. It's like, we could have just had this debate based on direct evidence and

first principles, and what about the absorption rates? We think of this as a way to kind of sidestep all of that and say, well, whatever all that stuff is, let's see what the smart people do when they make purchases for themselves. Yeah. We're sort of assuming whatever differences do or do not exist, doctors and pharmacists know more about them than people who are not doctors and pharmacists. So we can learn from their choices when they're shopping on their own dime what they think. Okay. So what do the smart people do? In the case of aspirin or headache medicine or something like that, do the pharmacists buy the name brand or do they buy and take the generic? They, by and large, take the store brand. So in the context of headache

remedies, about 92% of the headache remedies pharmacists buy are store brand. And we see that very consistently across other healthcare occupations, nurses, doctors, and so on. They're all buying way more store brand than the rest of us. As for the rest of us, about 74% of non-pharmacists buy store brand headache remedies compared to 92% for the pharmacists, so a big difference. Coming up on Freakonomics Radio, an economist like Steve Levitt prides himself on thinking with his brain rather than his emotions. So, does this apply to personal consumption? Oh yeah, I always buy the most expensive golf ball because if there's even the tiniest chance that there's a little magic in there, then I want that magic.

And what about Jesse Shapiro and Matt Jensko? the tiniest chance that there's a little magic in there, then I want that magic. And what about Jesse Shapiro and Matt Jensko? Did studying generics make them buy more generics? I think I probably buy a little more now than before we wrote the study. Not so much because of anything I learned from the study, but more because I think I would just feel hypocritical buying the branded good after writing this paper. And one more thing. If you don't already subscribe to Freakonomics Radio, why don't you give it a try? You can sign up for free at iTunes.

Based on what we've learned on today's program, Freakonomics Radio is probably just as good as This American Life or Radiolab. From WNYC, this is Freakonomics Radio. Here's your host, Stephen Dubner. Today we're talking with two economists about how experts tend to buy cheaper store brand items like aspirin or kitchen staples. And why is that? Presumably, it's because they know enough to know that the store brand items are just as good as the more expensive name brands. So you might think that economists behave the same way. Economists like Steve Levitt,

my Freakonomics friend and co-author. So Levitt, what about you? Are you a slave to name brands? What are some products that you only buy a name brand of? It is funny. I'm a little bit into the magic. And so when I am at the store and I'm looking at branded or unbranded, I honestly, each time I look at it and I ask myself for a particular application, do I think there could be magic in the brand? Sometimes I do and sometimes I don't. And it doesn't probably follow any logic. But, you know, I'm not very price sensitive anyway. So if I think there's even a little chance that there's some special magic built into it, I'll pay double for just even the whiff of magic.

I'll pay double. So I'm guessing the realm in which you suspect this magic may apply would be golf balls, for instance. We always buy the premium brand golf ball. Oh, yeah. I always buy the most expensive golf ball because if there's even the tiniest chance that there's a little magic iniro, meanwhile, argue that a lot of that brand name magic is an illusion, which means that a lot of people are spending a lot of money they probably don't need to. So what does that add up to? Here again is Jesse Shapiro. We look at six different headache medicines, you know, aspirin, ibuprofen,

acetaminophen, and so on. And I think we estimate people are spending about $8 billion on those alone every year. And there are other, you know, headache remedies out there. And I think we find in those categories that if everyone were to act like a pharmacist, people would spend between $1 and $2 billion less every year. And how should we, the populace, think of that one or two billion dollars? That's one or two billion dollars that would not be going from individuals' pockets into corporate pockets and then distributed to their friends, families, and shareholders, etc. Is that okay for the economy that people are overspending on premium brands because it's something that they want and they're just, you know, revealing their preferences? And even if it's the placebo effect,

hey, you know, placebo effect is not nothing. Or is that, in your view, as economists, just a waste of time and money? I mean, it really depends on whether you accept that people would like to act like doctors and pharmacists act and they just don't know enough to do it. If you take that premise, then, yeah, people are making a $1 to $2 billion mistake. If you want to say that believing that branded medicines are better allows them to work better and reduces headaches more and so on, then are susceptible to marketing and advertising to a degree that we shouldn't be?

That we are, quote, informed by things that aren't really very informative? That we're just gullible generally? What does it argue? I think to answer that question, it's good to take account of this full set of products that we look at. So we start with this case study of headache remedies, where we find these very big effects. We look at other over-the-counter medications, where we see similarly big effects. And we look at these pantry staples like sugar and salt, where looking at chef's purchases, we see similarly big effects. So for all those

categories of products, the takeaway conclusion is, yeah, this seems to be a mistake and people are misled either by advertising or by just absence of knowledge that it would take to make good decisions. But we also go look across a much broader set of products in the supermarket, everything from soft drinks to frozen entrees to all kinds of different products you would buy in the supermarket. And know, everything from soft drinks to frozen entrees to all kinds of different products you would buy in the supermarket. And what we see in that really big set is there are actually lots of product categories where the experts don't differ systematically in their purchases. And even a couple of categories where experts like chefs seem to be more willing to pay for brands. And so across all those categories,

it looks like maybe there are many where the brands really are better. And so the big picture I would say is we know that if we look at the products where we would have been the most worried that there aren't any differences, like headache remedies are really chosen to be if there's any product category

where you would have thought that these things can't possibly be that different, it would have been that. So when we look at those places, we see, yeah, there are some big mistakes. But we're also very far from the situation where all brands typically are better or there are differences across products and differences across brands. And the heuristic that, yeah, I should probably pay a little extra to go with a brand that I trust isn't so bad. That's like a pretty good way to make decisions on average. The problem is it's a good heuristic in some places. It's not a good heuristic in some places. It's not a good heuristic in other places. And like a lot of things, people apply the same rule too broadly and end up making mistakes as a result.

I'm curious what you've heard from advertisers or marketers about your research. I mean, on the one hand, your research is this massive compliment to them. You're saying to them that you could take two identical objects and make one three times more valuable by designing a nice package and writing great jingles. On the other hand, you're saying, oh, everybody who responds to your fantastic work is kind of an idiot. Well, we're fortunate enough to have two marketers as co-authors on this paper. One of our colleagues at Chicago, J.P.

Dubé and Bart Brannenberg, who's a marketing professor in the Netherlands. So, you know, we get their input on this. They don't seem to be walking around incredibly depressed, at least as far as we can tell. Yeah, but they're professors of marketing. They're not making their money by selling products, right? Fair enough. No, but they're teaching their students how to market products. And I think they think, and I think that, you know, the data are supportive of this, that there are a lot of categories where marketing effort really is helping people. And I don't think there's anything in the paper that really disputes that. It's just that there's a subset of categories where it looks like people are overpaying for brands.

The other thing you have to remember is, you know, pharmacists, take pharmacists and doctors buying headache medicine. In the case of aspirin, the national brand costs maybe five times per pill what the store brand costs. So at a 5x price, the experts are generally buying store brand. Maybe at a 2x price or a 1.5x price, you'd get some of those doctors and pharmacists buying the national brand. You know, we don't know for sure. I like to think about the thought experiment. Imagine that you walked into a supermarket or you walked into Walmart or you walked into CVS

and instead of all these fancy, brightly colored branded packages, you know, everything was just in white boxes with like black labels stating what it was and you had no brands in the store and you tried to walk around and like figure out what to buy. I think that would be a pretty hard situation for most of us. And it would like spend a lot of time trying to get your groceries. I think the brands are serving first as a marker

of quality. Second, as a way to just make all of these decisions, we have to make every day easier and deploy a little psychology to help us be able to quickly identify and get what we want. I think there's clearly a lot of value being produced there. The question is just, you know, where is it more? Where is it less? Are firms exploiting the same mechanism that's sort of useful in many places to drive up their profits in a small number of categories. I'm curious how this has changed your guys' consumption habits, especially if you have kids, especially when it comes to, you know, cold and flu or baby, you know, allergy medicine or anything that you might give your kids or yourselves? I don't know. I mean, I buy a lot of store brand stuff. I think I probably buy a little

more now than before we wrote the study. Not so much because of anything I learned from the study, but more because I think I would just feel hypocritical buying the branded good after writing this paper. And I'm more afraid of that than any risks of store brand medication. I also pretty much buy just, you know, store brand over-the-counter

things and generic prescription things, even for my kids. I think that was true before this paper. I don't think it's really changed much. I think, you know, my experience, I guess, was kind of growing up in a milieu where this message that you're kind of a sucker if you pay extra to buy brands was pretty pervasive. And so something you see a little bit in our data, I think there's a kind of generational thing where 20, 30 years ago, generics actually weren't very good. And so maybe you carry that forward. But this seems like, for my own personal habits, it's something that hasn't made a huge difference. Yeah, that's a great point. And I guess it'd be nice to know from you guys,

not that this is your realm, but how is a shopper to tell the difference between a store brand generic and just a piece of junk? I mean, sometimes the line is pretty thin, right? All they need to do is go get access to the Nielsen Home Scan panel and do a survey of a bunch of experts and just run some regressions.

And then it's like pretty easy to figure out. Easiest thing in the world. Easiest bunch of lazy civilians out there. Why aren't they doing that? As you say, this isn't our area of expertise, but my sense is that store brands have gotten a lot better and that major retailers now invest a lot in the supply chain for their store brands and trying to make sure that they're as comparable as possible

to the national brands that are side-by-side with them on the shelf. You look at data on trends, you know, store brand as a share of purchases has just been going up tremendously, started in the 1990s, really taking off and has continued to do that. So I think for most categories, you know, at least these kind of, you know, supermarket and drugstore kinds of products, I think it's pretty safe to buy a store brand. And then there are going to be cases where it's just a matter of personal taste. Like maybe you don't like the taste of the store brand cola or something, you know, then I don't think you need an economist to tell you, you probably shouldn't buy that kind. All right. So trying a store brand cola

and seeing how your taste buds like it compared to Coke is pretty simple and cheap and there's not much commitment to it. What about something way bigger, choosing a college maybe? How is someone supposed to assess the premium brand versus, you know, let's not call it the generic college, but the less premium brand of college? I think that's a great question. We should do a survey and see where professors at fancy name brand colleges are sending their kids. I was going to say, I think the same methodology would deliver a very convincing answer in the opposite direction, that if you took the somewhat controversial view that college professors are sophisticated and know what they're doing, which could be debated at some length, definitely college professors at fancy universities also pay extra to send their kids to fancy universities,

for sure. Although that's a little bit of a self-reinforcing pat on the back, right? Because if I'm a professor at a fancy university, especially, plainly, that type of university only is deserving of my offspring. Well, there's an element of that in all these products, though, because it could be that a chef doesn't want to have store-brand baking soda on their shelf. They want to have some fancy baking soda from Italy or something like that so that they can tell a story about how sophisticated their tastes are for baking soda.

You might have seen the same thing there, and maybe there is a little bit of that going on. And it would be interesting to look at college professors more generally. I bet it's the case that faculty at state universities are more likely to pay extra to send their kids to Ivy League universities than the average person. Who knows? That's speculative. Is that your next study that we should be looking for then? Because, man, people would read that.

This was your idea. Maybe we should work on this together. Thanks to Jesse Shapiro and Matt Jensko for their fine knowledge today. And thanks to everyone who took part in our peanut butter and jelly taste test, which you will recall was really a taste trick. All the PB&J was store brand, and it seemed like everybody liked it just fine. Caroline English made the sandwiches. They were eaten by Matt

Abramovitz, Greta Cohn, John Delore, Jana Fried, Karen Havlick, David Herman, Matt Kilty, Beret Lamb, Laura Mayer, Andy Mills, Melissa O'Donnell, Greg Rosalski, and Stephen Valentino. We should say that not everyone was fooled by our taste trick. Dude, they taste exactly the same. Exactly the same to me. Thank you. Really?

After the sandwiches, we chatted a bit. For those of you who buy anything, which is everybody, what makes you buy a premium brand when there's a kind of store brand equivalent and when you buy a store brand and when you wouldn't? If it's a party and I'm feeling cheap, sure, you know, but like if it's going to be on display, then I would probably bring something that was premium. I would, in a heartbeat, buy generic medicine, because I can't taste it. And as a new father, when you get sent out to buy cold medicine for your screaming six-month-old, you're going to say, I want to save the five bucks and I'm going to buy the cheap one? There's a lawyer in the room, but I am going to say yes on that one.

And that's because I feel like most of these products, and probably this peanut butter too, is mostly made in the same place. My perception of these things is just like one big extruder that puts it in this jar and that jar, and they just label them differently. And so I'll save the five bucks, even on my toddler. Name one thing, if any, that you would never buy a store brand, generic brand, non-premium brand for. Orange juice. I'd never get the store brand of this very basic facial moisturizer that I pay like three times as much for.

Condoms. Anything that touches genitals is totally fine. I wanted to ask John, what else that touches your genitals would you not buy? I refuse to give you the end of your episode. Oh yeah, John? That's what you think. Hey, podcast listeners, on next week's show, we ask, what does it take to pursue something that everyone else thinks is nuts? No one took his ideas particularly seriously.

And he was ostracized and isolated. There were people who called him a great American humorist within the profession. He was intellectually alone. As it's been said, first they ignore you, then they laugh at you, then they fight you, then you win. We talk about three radical thinkers

whose lives did not follow a straight line. Outsiders by design, we call it. That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC and Dubner Productions. Our staff includes David Herman, Greg Rosalski, Greta Cohn, Beret Lam, Susie Lechtenberg, and Chris Bannon, with help from Simon Adler. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com,

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