THE APPLICATION OF BENFORD'S LAW IN PSYCHOLOGICAL PRICING DETECTION

Abstract

This paper presents the application of Benford's law in psychological pricing detection. Benford's law is naturally occurring law which states that digits have predictable frequencies of appearance with digit one having the highest frequency. Psychological pricing is one of the marketing pricing strategies directed on price setting which have the psychological impact on certain consumers. In order to investigate the application of Benford's law in psychological pricing detection, Benford's law is observed in the case of first and last digits. In order to inspect if the first and last digits of the observed prices are distributed according to the Benford’s law distribution or discrete uniform distribution respectively, mean absolute deviation measure, chi-square tests and Kolmogorov-Smirnov Z tests are used. Results of the analysis conducted on three price datasets have shown that the most dominating first digits are 1 and 2. On the other side, the most dominating last digits are 0, 5 and 9 respectively. The chi-square tests and Kolmogorov-Smirnov Z tests have showed that, at significance level of 5%, none of the three observed price datasets does have first digit distribution that fits to the Benford’s law distribution. Likewise, mean absolute deviation values have shown that there are large differences between the last digit distributions and the discrete uniform distribution implying psychological pricing in all price datasets.