Transaction Utility And Probability Theory

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Transaction utility theory
Jha-Dang (2004) explains that the concept of transaction utility state that the total utility derived from a purchase comprised of acquisition utility and transaction utility. He describes acquisition utility as the expected utility gained from acquiring the product (i.e. benefits of the product) compared to the cost of paying for it (i.e. the price of the product); while transaction utility is the difference between the internal reference price and purchase price of the product. It is derived from the feeling of psychological pleasure or satisfaction experienced on receiving a good bargain or deal. He pointed out that buyers were thought to experience satisfaction from the fact that they bought the product at a price
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She notes that three theories have particular relevance to sales promotion; that is threshold theory (Weber’s law), adaptation-level theory, and assimilation-contract theory. She states that threshold theory (Weber’s law) is concerned with the question of how much of a stimulus change is necessary in order for it to be noticed. She cites studies which show the evidence that there is a region of price insensitivity around a brand’s expected price within which price changes do not significantly affect purchase probabilities. Price differences outside that region, in contrast, she points out, were found to have a significant impact on consumer brand purchase probabilities. The findings imply that price changes of 5 % or less of the brand’s average non-promotional price do not result in significant changes. Raman & Bass (2002) indicate that several authors have applied the Weber-Fechner law in the investigation of price thresholds, and the empirica1 evidence reported in these studies supports the hypothesis of upper and lower price thresholds and thus a range of prices which is considered acceptable. They point out that the Weber-Fechner law provides a means of experimentally determining such thresholds. Thus prices below the lower threshold are considered too low (quality is suspect) and prices above …show more content…
They argue that the behavioural rationale for this is that most people are more strongly affected by losses rather than gains, even if the amounts involved are the same. In the context of price response, they contend, we may view a price higher than the reference price as a "loss" (from the consumer's perspective), and a price lower than the reference price as a "gain." Prospect theory thus implies that consumers would be more strongly affected in the former than in the latter situation. According to Boztuğ & Hildebrandt (2005) prospect theory assumes a range of zero around the reference price. They explain that the prospect theory is used to describe decisions under risk, pointing out that the price decision can be seen as a risky decision, hence the concepts of prospect theory can be used to evaluate prices. They add that with Thaler’s introduction of the theory of mental accounting, it became possible to generate different price scenarios as

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