The Euro Illusion in Consumers’ Price Estimation: An Italian–Irish Comparison in the Third Year of the Euro

Abstract

The euro illusion is a transient phenomenon that consists of currency-related asymmetries in the intuitive judgment of product prices made by consumers. The results of a cross-country study in the third year after the introduction of the euro show a strong price estimation asymmetry in a country with an extreme exchange rate (Italy) and a weaker effect in a country in which the nominal values of the new and the old currency are much closer (Ireland). These results rule out proposed explanations of the euro illusion in price estimation that assume the sole influence of plausible anchors (reference prices stored in memory within the plausible price range), supporting instead accounts also endorsing the role of implausible anchors (reference prices outside the plausible price range). Beyond contributing to our theoretical understanding of the euro illusion, this research starts to unveil the interplay between structural factors (i.e., the currency exchange rate) and psychological mechanisms that produce long-lasting difficulties for consumers after a monetary changeover.

Appendices

Appendix A: Descriptions of the Products Used in the Price Estimation Study

• PRODUCT: 1 packet of 80 tea bags (250 gr/0.55 lb)

• –1 litre (1.8 pints) of orange juice

• –1 jar of paprika (34 gr/1.19 oz)

• –1 kg (2.2 lb) of white potatoes (bag)

• –1 drawing compass

• –1 packet of pasta (spaghetti) 500 gr (1.1 lb)

• –1 pair of office scissors: 16 cm (6 inches), stainless steel with blunt tips

• –1 DVD player

• –1 wardrobe with three doors

• –1 dental polishing (private dentist)

• –Compact car: New, 998 cm³ engine, three doors

• –3 star hotel in a tourist beach destination: one night and breakfast in July

• –1 ticket for a flight Dublin [Venice] – New York: no connections, roundtrip, economy class, August

Appendix B: Questions About Currency Conversion, Eurobarometer Questions, and Attitude-related Questions

Eurobarometer Questions

• –Today, would you say that the euro continues to cause you a lot of difficulty, some difficulty or no difficulty at all? (a lot of difficulty – some difficulty – no difficulty)

• –Today, when purchasing, do you count mentally most often in euro, most often in punt [lira], or as often in euro as in punt [lira] when it concerns exceptional purchases such as the purchase of a car or a house for example? (most often in euro – most often in punt [lira] – as often in euro as in punt [Lira])

• –Today, when purchasing, do you count mentally most often in euro, most often in punt [lira], or as often in euro as in punt [Lira] when it concerns common purchases such as day to day shopping? (most often in euro – most often in punt [lira] – as often in euro as in punt [lira])

Questions About Currency Conversion and Adaptation

• –How often do you convert the price of a product in punt [lire] in order to understand how expensive is it? (Never – Seldom – Sometimes – Frequently – Always)

• –How difficult was your adaptation to the euro? (Very Difficult – Difficult – Not difficult nor easy – Easy – Very easy – Don’t know)

Attitude-related Questions

• –Think about the European Union. Generally speaking, do you think that Ireland’s [Italy’s] membership of the European Union is ... (Very negative – Negative – Not negative nor positive – Positive – Very Positive – Don’t know)

• –Are you for or against the European Union having the euro as the single currency in all member states, including Ireland [Italy]? (Very Unfavorable – Unfavorable – Not unfavorable nor favorable – Favorable – Very Favorable – Don’t know)

• –How important is the single European currency to you personally? (Very Unimportant – Unimportant – Not unimportant nor important – Important – Very Important – Don’t know)

• –Do you believe that goods had become less or more expensive with the new currency? (Much less expensive – Less expensive – Not less expensive nor more expensive – More expensive – Much more expensive – Don’t know)