If you think that the affect price differentiation has on a consumer is limited to brands competing in a single category, like wine, think again. Shiv has shown in previous studies that people who paid a higher price for the same product actually gained a greater functional benefit.

In test after test, consumers who paid full retail for a brand that was supposed to make them feel more alert and energetic, such as Red Bull, were able to solve more brain teasers than those who paid a discounted price for the same product. Why? According to Shiv, they were convinced that the Red Bull on sale was much less potent than the full price product, even though all the drinks were identical.

Consumers typically suffer from a version of the placebo effect. Because we expect that cheaper goods were “more cheaply made”, they generally don’t work as well, even if they are identical to more expensive products. This is why brand-name drugs work better than generics, and why brand name bottled water tastes better than tap. "We have these general beliefs about the world—for example, that cheaper products are of lower quality—and they translate into specific expectations about specific products," said Shiv. "Then, once these expectations are activated, they start to really impact our behavior."