As most Canadians and regular readers of EclectEcon know, we have had some fun promotional battles in Canada between two of the major coffee chains: Tim Hortons and McDonalds.
Tim Hortons is once again running its "Roll Up the Rim to Win" contest (see here for my previous posting about it) from the last week in February through the month of March. And for the first two weeks of March, McDonalds was giving away its coffee for no charge.
These promotions had an interesting effect on me. When the promotions are not being run, I am pretty much indifferent between stopping at one place or the other for a breakfast sandwich and coffee on my commute to work. [They are close substitutes for me; I have a really high cross-price elasticity of demand]
When the Tim Hortons contest began, I started going there more often. The approximate pay-off to buying coffee there is 40 cents per cup, on an expected value basis [1/9 chance of winning and an average prize worth about $3.60 (rough guess on my part concerning the average prize retail value; the odds of winning a prize are Tim Hortons' official statement)].
But when the McDonalds promotion began, that meant a certain pay-off worth about $1.80 to me: my bill there was reduced by $1.80, the price of a large coffee. So I shifted my allegiance to McDonalds during that promotion even though I knew I was giving up the very small chance of winning a Rav4, $10K, a netbook or (with much higher probability) a coffee or bagel. In other words, when the McDonalds promotion began, I was not willing to pay (in an opportunity cost sense) $1.80 for what amounted to a lottery ticket with an expected average payoff of only 40 cents.
And now that the "free" coffee at McDonalds is no longer "free", I've switched back to stopping at Tim Hortons more often. I no longer have to forgo $1.80 worth of coffee to buy what amounts to a Tim Hortons lottery ticket. For me, the Tim Hortons lottery ticket is a gift from them to me.
My being unwilling to pay $1.80 for the small chance of winning a big prize with an expected value of $.40 probably means I'm risk averse (diminishing marginal utility of wealth).
But I wonder what I would do if McDonalds just sold their coffee for 40 cents off.... That would be a far better test of my risk aversion.