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Behavior economics is a relatively new concept that was developed by Daniel Kahneman and Amos Tversky and is known as the prospect theory. The prospect theory posits that consumers are inspired by the comparison of prices to the reference price rather than the actual price. Please discuss why managing price expectations is as important as managing price. Please give three examples of local restaurants using prospect theory. Include a minimum of one reference..
The prospect theory belongs to the behavioral economic subgroup formulated in 1979 and further developed in 1992 by Amos Tversky and Daniel Kahneman. These two developers deemed this theory to be more psychologically accurate of how decisions are made when compared to the expected utility theory (Chen, 2021). The prospect theory states that investors value gains and losses differently. Businesses tend to focus on customer obsession in order to keep their business alive. This is part of behavioral economics where many investors value gains due to losses causing a greater emotional impact. This also relates to why managing price expectations is as important as managing price. One example would be McDonald’s 2 for $5 deal where you can get two burgers or chicken sandwiches for the price of $5. But what if you can not finish both sandwiches? In this case, you would be at a loss where you would be spending half the amount but in reality, wasting double the amount (due to one sandwich costing about $5 each). Another example would be an UberEats pass subscription where members can pay a monthly fee to get all uber delivery fees waived for the month. This is good for someone who uses UberEats a lot, but for someone who wants free delivery and does not use the app as much, would not benefit the same way as someone who would UberEats on a daily. This person would lose more money than paying the delivery fee per order. The idea of the UberEats pass looks like it would be beneficial as the customer is drawn to “free deliveries” but in reality, they are the ones who are losing money to it. One final example would be from any department store where they have items for buy one get one 50% off. Customers are drawn to this deal based on the wording of the sale. One item, for example, can be found to be around $49.50 plus tax and buying two would cost around $100. With the deal you are technically paying $75 for two items when in reality you are only getting 25% off your purchase. But since customers are more drawn to seeing 50% off compared to 25% off, they are more likely to go with the 25% off purchase. It is all part of the prospect theory where people are more likely to purchase things based on what they believe would save them more money, when in actuality it may end up costing more.
Chen, J. (July 2021). Prospect Theory. Investopedia. Retrieved from https://www.investopedia.com/terms/p/prospecttheory.asp
You always continue to see McDonald’s and Burger King slug it out publically on their commercials. I have seen them compare their prices against the others and have seen the fact that one may have more meat or beef than the other. Since these restaurants are fast food giants, then they will do whatever it takes to get business from one over the other. Wendy’s is also taking shots at both restaurants by giving the never-frozen beef ad. Burger King says they are better because they are flame-broiled. Then they will give you these deals to try to compare how their brand is better than the others. Many other places do this to include Walmart. They have a sign that says compare to another supermarket. I saw in Wal Mart a grocery cart filled with groceries that gave the price of shopping at Walmart versus their competitor and it showed how much more the customer was shopping at Walmart. The psyche was to keep the customers to keep coming to Walmart to keep saving versus going to other stores. However, you do have to consider the quality of food. I do not shop at Walmart for my groceries. I go to a Texas-based grocery business of HEB and the quality of food is a lot better than Walmart. Walmart is trying to keep the customer in only their store than venturing to another business.
When it comes to managing expectation and managing price, it plays to the need for a sense of control. Customers can make rational decisions because when they go to the same restaurant over and over, they feel they know what they are getting for their money. There are factors for customers expectation and customer expectation can be a complex equation and factor based like the extent of comparison products, how strongly the customers desire the products, the competitors etc. Example is hairstyles from two different salons . I have been going to this beauty salon for 20 years and I started slacking up because she really took her price up about 60%. This other salon can do the same style at a cheaper price and I have seen her work also.
I think I would switch salons to fit my budget even though I ben going to this particular salon 20 years but the price is not affordable anymore. Popeyes and KFC. kFC has this certain taste to their chicken I like and I also ike Popeyes because they have crunchy and less greasy chicken for a better deal. Even though I wanted KFC, but Popeyes is cheaper, less greasy and math my budget. Uber and Yellow Cab. Uber has a luxury ride, complimentary and get you to your destination faster. Yellow Cab is the same price but slower driver and no complimentary. I would chose the Uber because I need to be on time and his price is good for all you get out the ride.
Chan, Roy s., T. & Price, Cheema Price Expectations and Purchase Decisions www.doi.org
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