Question

The textbook mentions that people do not always notice all the details of prices, or anticipate what price they will end up paying for a good or service. How can firms use this lack of rationality to help them make more profit? Focus on identifying some real world example.

Answer 1

To maximize the benefits of lack of rationality among the consumers, firms can opt for different strategies. The first strategy is to keep price of the basic services, and keep separate prices of the add-ons and taxes as extra. It will first attract the customers, but they will end up paying a higher price for the product or services. For example, in restaurants, price are put on the menu that are base price, without any service charges or other key benefits required to take the meal. Finally, the bill size increases and customers have to pay more. The second strategy is to highlight the best features of the product and promote the product as a unique product. It will create value among the target audience and they will willingly pay the higher prices. It will increase the firm's profitability. The third strategy should be bundling the product and putting a bundled price. Here, people will focus upon different products coming together and will not be able to rationalize the collective price. So, they will end up paying almost equal price of the products and firm will save the discount what they had to give to the customers. For example, firms in retail shops or in food market do it to earn more profit.