A large home improvement retailer has run an advertisement for a particular brand-name titanium drill bit set. The headline of the ad is “Was $19.97—Now only $14.97!”
(a) What is the external reference price that is mentioned in this ad?
(b) Assume that the external reference price mentioned in this ad causes the advertised selling price (i.e., the price at which the item is being sold) to be perceived by consumers as a loss and a gain. Assuming this, give an example of what that consumer’s IRP would have to be.
(c) Given the assumption of Part (b) and the IRP that you gave as an example, what would be the dollar size of the loss that the consumer perceives? What would be the dollar size of the gain that the consumer perceives? Briefly explain your reasoning.