Transaction Utility And Probability Theory

Great Essays
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
…show more content…
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

Related Documents

  • Great Essays

    The objective is to determine the optimum values of lot size and shortage period, which maximizes the expected average profit. Shah and Soni [28] proposed a multi-objective production inventory model with backorder for fuzzy random demand under flexibility and reliability of production process, the objective is to maximize the total expected profit incurred in each production cycle which is optimized using a multi-objective genetic algorithm (MOGA). Tripathy and Pattnaik [29] developed a model in a more general way to the work of Cheng [2], Tripathy et al. [30], Tripathy and Pattnaik [31], and assuming that demand exceeds supply, but the unit cost of production is inversely related to process reliability and directly related to the demand rate by a power function. Numerical example gives that this situation makes saving in the unit production cost than proposed by Tripathy et al.…

    • 1669 Words
    • 7 Pages
    Great Essays
  • Superior Essays

    It directly affects customers’ actions and satisfaction. He suggests that service is an intangible production, it is supposed to sell to the customers. Customers purchase a good service, and feel satisfied. Therefore, a good service can include lots of things, such as attitudes and actions (Lv, 2008). He states that customers’ satisfaction depends on the service.…

    • 734 Words
    • 3 Pages
    Superior Essays
  • Improved Essays

    They want to know the amount of demanded changed when the price change. In other words, they want to know the elasticity which measures the responsiveness of demand. The two keys to understanding it is the sign and value of the answer. However, the PED tend to be a negative number because the quantity of demand fall when the price rise. So we usually more focus on the value.…

    • 997 Words
    • 4 Pages
    Improved Essays
  • Decent Essays

    Journal Description Strength Weakness On the product line selection problem under attraction choice models of consumer behavior (Schön, C. , 2010) This paper shows an exact approach for maximizing profit-oriented product line design (PLD) with continuous price. This exact approach separated by consumer behaviors into two models, which consumer choices are aggregated or broken apart into each customer segment (different price). The consumer behavior in this approach is predicted by famous attraction models. 1. This approach considers customized price setting, which is beneficial for firm’s strategies 2.…

    • 1677 Words
    • 7 Pages
    Decent Essays
  • Great Essays

    The probability of getting a critical ratio as large as 2.961 in absolute value is less than 0.003. In other words, the regression weight for Perceived Quality towards Purchasing Decision is significantly different from zero at the 0.01 level (two-tailed). Thus the hypothesis of Perceived Quality towards Purchase Decision is significant and supported by the data. The next data as can be seen from the table 4.7 above is the P value of Brand Awareness is 0.926. This means the probability of getting a critical ratio as large as 0.093 in absolute value is 0.926.…

    • 1896 Words
    • 8 Pages
    Great Essays
  • Improved Essays

    This creates an impression that consumers are paying a lower price for the product, leading to an acceleration of sales (Lamb et al. 2008). The issue of reference pricing also presents manifold challenges to marketers (Abedniya 2011). Reference pricing refers to the price against which consumers compare the listed price of a product or service with the discounted price (Anttila 2004). In this way consumers evaluate whether a price is too low or too high as they make their product choices.…

    • 861 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    The Importance of the Concept of Elasticity in Microeconomics The concept of elasticity is intended to measure the degree of responsiveness of a buyer or seller to a change in a key determinant, in particular price. 1 In other words, elasticity means how sensitive are consumers for a price change. I would like to talk about elasticity from the perspective of the total revenue. As we already know from the law of demand, when the price goes up, the quantity goes down. However, thanks for this equation, we can measure whether the product is elastic or not.…

    • 733 Words
    • 3 Pages
    Improved Essays
  • Superior Essays

    Historical cost accounting provide information about how well or badly managements do their duty to shareholders. Among the comparisons between fair value accounting and historical cost accounting before, the advantages of fair value accounting is more than those of historical cost accounting. In my view, I prefer balance sheet approach at fair value. Fair value accounting has many advantages which are discusses above and also is a trend under regulation. The main weakness in fair value accounting is that when market is not perfect, how to get fair value from market.…

    • 1161 Words
    • 5 Pages
    Superior Essays
  • Improved Essays

    Marginal Utility underlies the Law of Demand because it includes the additional utility that can be received by a consumer. Consumers want to receive the maximum utility of a product and this creates the Law of Demand. 4) Define and explain Elasticity. Be sure to explain any terms. Elasticity is how economists measure a good’s sensitivity to a change in price or quantity.…

    • 831 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    The theory of foreign direct investment suggest that portfolio diversification decreases the performance risk. This means that the investments are spread over different locations, and consequently, a firm does not have the same exposure to risk (Lessard, 1974). Another benefit of foreign direct investment, according to Buckley and Casson (1976), is that the scope and economies of scale lower the costs by dividing common functions within the firm and increasing its volume. Another study from Hymer (1976) supports the foreign direct investment theory mentioned by Lessard (1974) in regards to market power enhancement. Market power enhancement shows that the market is imperfect and that firms are capable to benefit from their market power to gain strong revenues by investing cross borders.…

    • 1247 Words
    • 5 Pages
    Improved Essays