Course: Microeconomics, Pricing & Costing

Topics: PROSPECT THEORY & EXTREME AVERSION

Topic 1: PROSPECT THEORY

• Indicates that is better to unbundle gains and bundle pains.
• In terms of versioning, the gains that customers receive are the many benefits delivered through the product.
• High-level versions deliver more benefits; lower- level versions deliver fewer benefits.
• While all the benefits are bundled in a single product, the individual benefits can be isolated and highlighted during purchase decisions to encourage customers to select a higher-value product.

Topic 2: EXTREME AVERSION

• Arises from loss aversion. Compared to reference point, consumers are more averse to losses away from that reference point than they are gain-seeking to improvements to that reference point, as discussed with respect to prospect theory.
• The losses in benefits in moving from a middle version towards a lower-quality version will loom larger than the gains in savings by purchasing at a lower-price; hence, humans may be averse to the lowest product within a lineup.

Questions:

1. Make a script report with important details and examples about Topic 1: Prospect Theory.

1. Make a script report with important details and examples about Topic 2: Extreme Aversion.