Our weekly explainer on economics using lessons from popular culture. In Installment 44, Elaine from Seinfield falls for Transaction Utility.
In an episode of the most popular sitcom of all time, Seinfeld, Elaine qualifies to get a free sandwich from Atomic Sub after eating there 23 times and getting a loyalty card stamped. She loses that card and, throughout the episode, is obsessed with getting it back so she can claim that free sandwich. She meets a horny guy she doesn’t want to date, puts up with steam explosion in a shop, messes up her hair and eyes, and generally goes through many indignities for that one goal – getting the free sandwich. It’s not about just getting a free meal, as we find out later in the episode. The owner of the store where she is waiting for a call about the card says, “If you want a sandwich, I’ll make you a sandwich.” She responds: “I want the one that I earned!”
Why did Elaine care so much about a random free sandwich from a shop she describes as selling “crap”? Just to get that free sandwich that she earned. And that forms the basis of Transaction Utility Theory.
Traditionally, economists have viewed any purchase as a decision about “utility”, or the benefits the buyer gets from the product or service. You buy a sandwich because you’re hungry and you like the way it tastes. You buy a car because you want means of transportation in a vehicle that you find aesthetically pleasing. In the traditional economics view of transactions, your decisions were driven purely by what you get out of consuming the product or service.
Then, recent Nobel laureate Richard Thaler came along and said, “No wait! A lot of us also make decisions based on the transaction itself! Which means that your “utility” for a purchase is not just about the eventual consumption, but also about the purchase transaction itself.”
That’s what he defined as Transaction Utility. He defined it as the difference between the actual price and your “reference” price. We derive satisfaction or “utility” from that difference in the transaction. Elaine is obsessed with the sandwich, not because she likes how it tastes, but because she will get it for free. And you might buy a car not because you think it’s the best car, but because you think you’re getting it for a great price.
It’s about the happiness you get out of the transaction itself, not the consumption.
Assume you are an Indian Premier League (IPL) fan. You participate in an FM radio contest and win a free ticket to the IPL final, which is worth 1000 rupees on the open market. Your friend who is an even bigger IPL fan offers to buy that ticket from you for 5000 rupees. Do you sell it or attend the match yourself?
In a separate situation, assume you are an IPL fan, and you participate in an FM radio contest and win 5000 rupees cash. You really want to go to the IPL final, and you see that online, the 1000 rupees tickets are selling for 5000 rupees. Do you buy it or ignore it?
Thaler asked similar questions to a lot of respondents and effectively found that in the first instance, most IPL fans would attend the match themselves instead of selling the ticket for 5000 rupees. But in the second instance, most IPL fans would not spend 5000 rupees to go watch the match. (He used baseball’s World Series-based questions, but we are Indian, so kindly adjust.)
This disparity exists despite that fact that in pure economics terms, the two instances are identical! If you place a 5000 rupees value on attending the IPL final, then your responses in both cases should be the same. They are not, because in one case, you are getting a “good deal”, and in the other case, you’re not.
Let’s take another example. You see a t-shirt you really like in a store that is being sold for 500 rupees. You walk into the store and the salesperson tells you the same shirt is available in another branch of the store 10 km away for 400 rupees. Do you travel that extra 10 km to save 100 rupees?
On another day, you are looking to buy a fancy blazer for an interview. You go to a store and pick the blazer you like and it costs 7000 rupees. The salesperson tells you the same blazer is available in another branch of the store 10 km away for 6900 rupees. Do you travel that extra 10 km to save 100 rupees?
As you can intuitively predict, many people will travel the extra 10 km to save 100 rupees on a 500-rupees purchase, but few will do it to save 100 rupees on a 7000-rupees purchase. That makes no sense if you think about it in a purely “economics” way. For anyone, the utility of 100 rupees should be the same, whether they are saving it on a small purchase or a large purchase.
But we are humans, not rational economists. We put a value on the transaction, and the benefit we get from it, always thinking, “Am I getting a good deal?” If we think that we are getting a good deal, we are likely to buy stuff we would not otherwise buy.
Zomato Gold is the perfect example of this. People are subscribing to it and often eating at places they normally would not visit if paying full price. Not because they necessarily think the food is great, but because they get Transaction Utility out of using Zomato Gold and saving a lot of money. It’s not about valuing the actual consumption experience, but about saving the money in the transaction.
We all love a good deal. And we have all bought things we might not have otherwise bought, just because it’s a good deal. That’s a key principle of Behavioral Economics: a principle that shows that we are more human than we are rational.