Victor Preston Foundation

  Consumers expend mental effort to make purchase decisions. Comparing a large number of products can result in “decision fatigue”. For example, a couple planning a vacation could be overwhelmed when selecting from multiple destinations and activities. Behavioral economics has found that when decisions are perceived as complex, people often rely on mental shortcuts (Thaler, 1985;1999). Predetermined packages, in which destinations and activities are selected by the offering company, simplify decision making. These packages are referred to as “bundles”. Customers often do not calculate the actual savings from the bundle vs. purchase of the individual items in the bundle. However, bundles can increase perceived value through the convenience of the predetermined package and reduction of “decision fatigue” (Thaler, 1985). Bundling can also be used to attract new customer segments (Nagle, Hogan & Zale. 2011). Example: A 100-room ski lodge in the Pacific Northwest offers rooms du...

  B ehavioral economics has found companies often rely on heuristics and fall prey to cognitive biases when making pricing decisions. Companies may anchor on competitors’ prices, assuming that “market price” is fixed and must be matched or beaten (Kahneman & Tversky, 1974). The herding bias may also negatively impact performance. The herding bias presents as the tendency to mimic competitors’ pricing actions despite a lack of evidence that this mimicry i mproves profit ( Kienzler, 2018) . These biase s can lead companies to believe price discounting is the best tactic when value-based pricing is more likely to produce higher profit . P rice reductions can trigger negativ e price–quality inferences in consumers when the price reductions are uncommon in the industry, price reductions have not previously been offered, or the consumer has only basic industry knowledge . C ustomers may assume a lower price signals lower quality, reducing willingness to pay in the future. Re...