Question

Briefly explain these two theories in pricing: Rounding Off Theory & Bargain Signaling Theory.

Answer 1

Rounding off theory refers to the situation where the prices or costs are rounded off to a nearby boundary of those numbers. This a psychological pricing method. For example it has two parts where the decision makers may either round down or round up the cost or price. Say there is a price increase from $ 31 to $ 34, most of the customers won't mind and will round down the cost to $30. This also doesn't affect the overall sales. However, when the price is increased from $31 to $36, a significant fall in the sales is seen as customers round up the price to $40.

Bargaining signaling theory is applied when there arises a problem of adverse selection. This adverse selection arises because of information asymmetry. It signals the various preferences of parties where the are given a choice for their cost. The parties can either pay the cost ex post that is based on the actual results or they can opt for sunk cost which is an ex ante cost i.e. the cost is based on the forecast and not the actual results.