Prospect Theory: Kahnemann And Tversky (1979)

Consumers’ purchase decision is affected by many attributes of the good purchased. While these variables have different influence on every consumer, price is certainly one of the most important variables that drive the purchase intention. Undoubtedly, the price’s role is increasingly greater for fast moving consumer goods (FMCG) and price discounts usually stimulate larger sale of the product. Therefore, the format how prices are framed and presented / communicated to the consumers is a very powerful lever for pricing managers.

Aside from its qualitative attributes, price “discounts” are widely used as an effective tool for increasing the product’s perceived “inherent” value in the eyes of the consumer. Discounted prices, ceteris paribus,

In their Prospect Theory, Kahnemann and Tversky (1979) were the firsts to suggest that consumers perceive differently the same information depending on how it was framed and presented to them. They posit that even in situations where there are no differences in the key features of the conditions, such as probabilities, outcomes and alternatives, consumer’s perception and thus decision is influenced by the way the problem is defined. This concept is known as the Framing Effect (Tversky & Kahneman,

According to the Code of Federal Regulations (Federal-Trade-Commission, 1967) there are three basic types of reference pricing in retail practices for the same product: 1) Former price comparisons - reduction from the advertiser’s own former price for an article; 2) Retail price comparisons (comparable value comparisons) – comparing an advertised price to a price charged by others for the same merchandise in the advertiser’s trade area; and 3) Advertising retail prices which have been established or suggested by manufacturers (or other nonretail