A Lesson from Israel About Postpenny Pricing
A policy change provided a valuable learning opportunity.
- By
- January 01, 0001
- CBR - Behavioral Science
The secretary of the US Treasury recently decided to kill off the 1 cent coin, citing rising production costs. As the last pennies enter circulation in 2026, US retailers might take note of what happened in Israel, where a nationwide change in pricing policy led many supermarkets to misprice their goods—and dent profits.
What went wrong? Chicago Booth’s Avner Strulov-Shlain dug into the numbers, finding that after Israel disallowed pricing in coins that had been eliminated years earlier, supermarkets mispriced items due to an incomplete understanding of consumer behavior. Retailers had been using heuristics (simple rules) to set prices, which allowed them to learn what pricing strategies worked but without understanding why, he writes, cautioning that while this approach can succeed much of the time, it can be also be fragile during periods of change. The supermarkets’ experience provides a lesson for companies of all kinds on how to avoid similar mishaps, he writes.
Israel’s main currency is the shekel, which comprises 100 agorot. The country eliminated the 1 agora and 5 agorot coins in 1991 and 2008, and in 2014, disallowed prices ending in subunits of less than 10 agorot. For instance, prices such as 4.95 and 4.96 were banned, but those such as 4.90, 5, and 5.10 were still allowed.
This presented a conundrum since many prices globally end in 99, which capitalizes on a quirk of human psychology, whereby people focus almost entirely on the leftmost number and largely ignore those to the right. In effect, this “left-digit bias” means that people perceive $4.99 or €499.99, say, as more than 1 cent less expensive than $5 or €500, respectively.
Looking at supermarket data from across Israel, Strulov-Shlain finds that prior to the policy change, the 00 ending was almost entirely absent. According to his calculations, companies should have shifted to prices ending in 90 rather than 00. Even though rounding prices up in response to the policy change might have seemed logical, the resulting demand loss led to lower profits, he finds. The “left-digit bias that justified many 99-endings also supports the use of 90-ending or higher prices, but not 00-endings,” he writes.
A lesson in left-digit bias
A policy change in Israel revealed that stores may not have fully appreciated the human tendency to focus on the leftmost number in a price. When stores could no longer have prices ending in 99, up to 20 percent of products were instead erroneously rounded up to the next whole number. Research suggests that this reflects companies' deeper lack of knowledge of how to optimize pricing, but the forced experimentation helped them learn.
But companies did not act optimally. After the policy change, stores shifted to 00 prices about 20 percent of the time. And this mistake affected the bottom line: Changing a product’s price from 4.99 to 5 rather than 4.90 was associated with a 5–9 percent reduction in demand.
Over time, however, companies changed their strategy. Strulov-Shlain saw evidence of it in pricing patterns in the year following the reform. For instance, once an item shifted to a 90 ending, it tended to stay there. For the small subset of products that flipped back and forth between the two endings (for example, from 99 to 90 to 00 to 90), even these “switchers” were ultimately more than eight times more likely to settle at 90 than at 00. In contrast, prices that initially shifted to 00 were 15 times more likely to end up at 90 than to stay at 00.
Within a year, 65 percent of stores used 90 endings—considerably more than the 45 percent using 99 endings before the reform. This shift corresponded to smaller losses from nonoptimal pricing, suggesting that, for companies, the policy change had the unintended but fortuitous result of improving profitability.
Strulov-Shlain concludes that companies were operating with incomplete knowledge about their customers’ preferences, but that in time, their knowledge improved. “Overall, firms appear to price suboptimally due to incomplete or incoherent models and heuristic rules,” he writes. “Environmental shifts can amplify losses but can also jolt firms into exploration and learning.”
To prevent this kind of rude awakening, Strulov-Shlain recommends companies experiment more before extrinsic measures force them to. This may help avoid the uncertainty, swirl, and profit losses that come from incomplete knowledge.
Avner Strulov-Shlain, “Firms Have Partial Knowledge: Evidence from a Reform,” Working paper, September 2025.
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