Bargains and Rip-Offs

Consumer Behavior (Misbehaving: The Making of Behavioral Economics Book)

Faza Muhammad S
M10921837
 Mental Accounting
Maya were shopping at the store for a quilt to use as comforter for your double bed.

Prices

Double bed $200

Queen size $250

King size $300

This week only all sizes were price at $150

Most of the people will choose King size even though the blanket is oversized
and will hang a little on the side of the mattress
 Opportunity Cost

You have a ticket to a game that you could sell for $1000

One hundred
movies at $10 An upgrade to
each? your shabby
Is it better than? wardrobe?

Saving the money

for a rainy day or a
sunny weekend?
How can we possibly know which
of the nearly infinite ways to use
$1,000 will make us happiest?
An Interview About Consumers Decision Making

The target are lower-

middle class local
families

Hired students to do (Spending decisions are

To get an overall
interview much more important
impression of how people
when the budget is
thought about managing
tight)
their household’s finances
 The Question

The question is about when the costs becomes a loss.

This case raises question If you pay $5 for a sandwich, do you feel like you
just lost $5?

For routine transactions, the answer is clearly no. For one thing, thinking that way would
be miserable.
Why?
Because losses are weighed about twice as heavily as gains

With this type of accounting, even trading a ten-dollar bill for two fives would be viewed as a
loss.
So what does happen when make a purchase? And what
was Maya thinking when she bought that gigantic quilt?
 Acquisition Utility VS Transaction Utility

Acquisition Utility
“Based on standard economic
theory and is equivalent to what
economists call “consumer
surplus.” And for an Economist who
owns a double bed, the
acquisition utility of a quilt that
fits the bed would be greater
than one that hangs two feet
over the side in every direction.
 Transaction Utility
The difference between the
price actually paid for the
object and the price one would
normally expect to pay

When you buy sandwich at sporting
event identical to the one you
usually have at lunch, but it costs
triple the price.
The sandwich is fine but the deal stinks.
In contrast, if the price is below the
reference price, then transaction utility
is positive, a “bargain,” like Maya’s
extra-large quilt selling for the same
price as a smaller one.

It produces negative transaction utility, a

“rip-off”
You’re lying on the beach on a hot day, He will buy the beer if it costs as
all you have been thinking is a cold much or less than what you state, but
bottle of your favorite brand of beer if it costs more than the price you
1 state, he will not buy it
4
A friend offers you to buy a beer from
the only nearby place where the beer is You trust your friend and there is no
sold (a fancy resort hotel) [a small, possibility of bargaining with the
rundown grocery store] (bartender) [store owner]
2 5

He says that the beer might be What price will

expensive so asks how much you’re
willing to pay you tell him?
3
Experiments produced average
answers of $7.25 and $4.10,
respectively I don’t care as
long as I can
get a beer
According
to principle
Incentive
Compatible
A situation where
consumers can get the
best outcome to
themselves just by acting
according to their true
preferences

Paying seven dollars for a beer at a resort is annoying

but expected; paying that at a bodega is an outrage!
 Transaction Utility

 Great deals  Bad deals

 Prevent purchases  Encourage purchases
(welfare-enhancing) (waste of money)

Purchases that are simply a waste of money can be prevented, for example:
Dennis would pay
Actual price Contrarily Tom tells danis that this
$4 $7 $5 beer was bought at the hotel
Bodega Hotel Bodega
Dennis will think that the
purchase is worthwhile
Negative transaction utility will provide wonderful memories of a lifetime and amount
of the items which overpriced will long be forgotten

Positive transaction utility can lure all of us into making purchases of objects of little
value like everyone has rarely worn clothes in their wardrobe simply because ”must
buy” tagline and the deal was good.

That’s just the another version of Maya’s quilt

Used by seller

To manipulate the perceived reference price and create the illusion of a “deal.”
Those are “Suggested Retail Price” and “On Sale”
Characteristics: Bought infrequently and quality is difficult to assess
“It can simultaneously suggest that quality is high
(increasing perceived acquisition utility) and
increase transaction utility as well because the
product is “on sale.”
 Emphasize the principle of transaction utility in its
operations

“everyday low pricing

“large-format discount strategy”
retailers ”

“the entire shopping experience is an

orgy of bargain hunting to build
corporate image”
Thanks!