The well-known economic principle of supply-and-demand is supposed to work like this: the higher the demand in relation to supply, the more expensive a product would be. On the contrary, the lower the demand in relation to supply, the cheaper it would be. The idea behind this principle is that if a product is cheaper, the market for it would be increased, as a larger share of the population would be able to purchase it.

This is often the case. But not always. Economics and the market, as valuable as it may be to our society, simply cannot account for the psychology of human behaviour. The reality is that our behaviour as a species – even our economic behaviour – is much more complex than the dynamics of the market economy would let on.

For example, if you walk into a store and see two identical products next to each other. One of the products is priced at £10, the second at £40. Which one would you naturally assume is the best?

Yes, we naturally tend to believe the more expensive product is the best. Price tends to be a proxy for quality. When we see 3 different prices we assume the highest price is the best quality, and it gives us a sense of security. People are simply naturally sceptical of cheaper prices because of the perception that the quality of the product may be a complete disappointment. We actually often resist buying cheaper products because the deal seems “too good to be true”, and the assumption is that the “catch” of the deal lies in the product’s lack of quality. In this way, higher prices has the potential to actually attract more clients.

This preconceived idea regarding correlation between price and quality can actually impact our sensory experience as well. For example, studies have shown that when we eat more expensive pizza or drink more expensive wine we are likely to claim that these products taste better than their lower-priced varieties.

This psychological aspect of human behaviour actually often leads to what is commonly called price-quality signalling. This entails deliberately pricing your product higher than those of competitors to signal to the public that your product is of a higher quality.

Luxury brands, from companies manufacturing Swiss watches to boutique fashion houses, have used this strategy very effectively for decades, earning a reputation for quality not just because of the product itself, but because of the pricing that supposedly reflects quality.

In fact, some studies have actually indicated that the increase of the price of luxury products tends to have a positive impact on customer satisfaction primarily because of that sense of security more expensive prices tend to provide us with.

This sense of security is even more obvious in the service sector. If I have the choice between two services, let’s say a car mechanic, one charges £100 for a service and oil change and once charges £225 for the same thing, this huge price difference will actually make us sceptical, worried and less enthusiastic about the £100 service.

But in many cases this sense of security can be, to put it bluntly, simply false and misguided. Prices aren’t always accurate signals of product or service quality, but because of the practice of price-quality signalling, many of us are often fooled into believing that a more expensive product or service is better when in actual fact this isn’t. One way to avoid being fooled in this way is to do your own research about products that you don’t know much about – studying customer reviews online can go a long way in this regard. Alternatively, you could experiment a bit. If you’ve been avoiding a cheaper brand for no good reason, simply go ahead and give it a try. You might actually be pleasantly surprized and have your perceptions challenged.

Of course, as we all know all too well, sometimes it might also be the case that a cheaper product is, in fact, of a poorer quality, but it never hurts to give new things a try. You just might end up being able to save a lot of money by not being continually fooled by price-quality signalling.