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Behavior economics is a relatively new concept that was developed by Daniel Kahneman and Amos Tversky and is known as the prospect theory. The prospect theory posits that consumers are inspired by the comparison of prices to the reference price rather than the actual price. Please discuss why managing price expectations is as important as managing price. Please give three examples of local restaurants using prospect theory. Include a minimum of one reference.

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Managing Price Expectations: The Key to Restaurant Success

In the competitive world of restaurants, managing price expectations is as crucial as managing the price itself. Understanding and applying the principles of prospect theory, developed by Daniel Kahneman and Amos Tversky, can significantly impact a restaurant’s success.

Prospect Theory and Consumer Behavior:

Prospect theory suggests that consumers are more sensitive to changes in prices relative to a reference point rather than the absolute price itself. This means they are more likely to perceive a price as good or bad based on their comparison to a preconceived expectation, which could be a past experience, competitor prices, or perceived value.

Full Answer Section

Why Managing Price Expectations is Crucial:

Effectively managing price expectations can lead to several benefits, including:

  • Increased customer satisfaction: When customers feel they received good value for money, they are more likely to be satisfied with their dining experience and become repeat customers.
  • Improved brand perception: Restaurants that consistently offer fair prices are perceived as more trustworthy and reliable, enhancing their brand reputation and attracting new customers.
  • Increased profitability: Setting the right price based on customer expectations can optimize revenue and maximize profits.

Local Restaurant Examples of Prospect Theory:

Here are three examples of how local restaurants leverage prospect theory:

  1. Lunchtime Specials: Many restaurants offer significantly lower prices for lunch than dinner. This creates a sense of value for customers who perceive the lunch menu as a bargain compared to the higher-priced dinner menu.

  2. Limited-Time Offers: Limited-time promotions with discounts or special deals create a sense of urgency and scarcity, encouraging customers to dine sooner and spend more. The fear of missing out motivates them to act before the offer expires.

  3. Pricing Anchors: Restaurants often list a few high-priced dishes on the menu to make other items seem more affordable in comparison. This “anchoring” effect influences customers’ perception of value and guides their choices towards seemingly less expensive options.

Example Reference:

  • Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291.

Conclusion:

Managing price expectations is a critical strategy for restaurants to succeed in today’s competitive market. By understanding and applying the principles of prospect theory, restaurants can create value perceptions, increase customer satisfaction, and ultimately improve their profitability.

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