Question

3. Explain what we mean by internal and external reference prices –give examples for each. 4. Explain the value function and what each of these features imply: • It is flatter in the gains domain and steeper in the loss domain • It is a slanting s shape and flattens as gains and losses increase 5. Explain what we mean by multi attribute analysis or factors in purchase decision making. To help you do this, use the example that when we buy a car, we may consider the attributes of speed, paint quality, and seating capacity. Now explain how using prospect theory on each attribute we may have ‘perceived gains and losses’ with respect to our expectations or ‘reference levels’ for each attribute. 6. Give examples from advertising that would illustrate the principles that we do and should “segregate gains” and “integrate losses”. 7. Explain (you could use the value function to do this) how two discounts of $10 each, tend to have a greater impact than a single discount of $20.

Answer 1

Reference price can be defined as the standard against which a shopper can evalauate whether the price paid is right or wrong is known as the reference price. There are two kinds of reference prices namely internal and external reference prices.

Internal Reference price : It is the price which the buyer expects or assumes that the product should cost based on the past experience and the knowledge about the product. For instance, If somebody asks me how much to carry for buying a chocolate, I would say 20 INR based on my past experience of the price of chocolate.

External Reference Price : Any external factor or the marketer supplied reference price whcih influences the buyer is known as external reference price. For instance if a price tag says, Market price of T-shirt is 200 INR and the Shop Price is 150 INR, it acts as an external reference price and provides a sense of satisfaction to the buyer that the T-shirt is available at a relatively cheaper price in the shop.