Psychological Pricing

Full Answer Section

There are a number of ways to manage price expectations. One way is to use reference prices. Reference prices are the prices that consumers use to compare the prices of different products or services. For example, if a consumer is considering buying a new car, they might use the sticker price as a reference point.

Another way to manage price expectations is to use price anchoring. Price anchoring is a cognitive bias in which consumers rely too heavily on the first piece of information they receive when making a decision. For example, if a consumer sees a restaurant menu with a $20 appetizer, they may be more likely to order a $15 appetizer than they would if they had seen a $10 appetizer first.

Local restaurants can use prospect theory to their advantage in a number of ways. Here are three examples:

1. Offer a limited-time menu with discounted prices. This can create a sense of urgency and encourage customers to try new dishes.
2. Use price anchoring to make customers feel like they are getting a good deal. For example, a restaurant could offer a $20 appetizer and a $15 appetizer. Customers are likely to choose the $15 appetizer, but they will still feel like they are getting a good deal because they are comparing it to the $20 appetizer.
3. Use reference prices to make customers feel like they are paying a fair price. For example, a restaurant could list the prices of similar dishes at other restaurants on its menu. This will give customers a reference point to compare prices to.

Reference:

• Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.

Additional examples of local restaurants using prospect theory:

• A restaurant could offer a "happy hour" menu with discounted drinks and appetizers. This creates a sense of urgency and encourages customers to come in during off-peak hours.
• A restaurant could offer a "prix fixe" menu with a set price for a three-course meal. This can make customers feel like they are getting a good deal, even if the total price is higher than what they would normally pay.
• A restaurant could offer a "tasting menu" with a variety of small dishes. This can be a good way to encourage customers to try new things and to spend more money overall.

By understanding how prospect theory works, local restaurants can use it to manage price expectations and increase sales.

Sample Answer Managing price expectations is as important as managing price because it can influence how consumers perceive and value a product or service. If consumers have positive price expectations, they are more likely to be willing to pay a higher price. On the other hand, if consumers have negative price expectations, they are more likely to be hesitant to purchase a product or service, even if it is offered at a low price.