ECON 325

In Class Exercise Five - Behavioral Economics and the Psychology of Pricing - Part One

1.  Explain why some behavioral psychologists would argue that the demand curve slopes upward.  Give an example of a "psychological" reason this would happen.  Then explain how a mainstream economist would respond to that.

2.  Another difference between most economists (but not all) and some behavioral psychologists is that they say that people can act in an irrational way.  What do they mean by that?  Discuss two possible reasons they might make that claim.

3.  How would a subjectivist economist respond to your answer in #2?  Explain.

4.  Veblen argues that people buy things not simply to obtain utility from the object but in order to do what?  How does this fit into an explanation that people are NOT irrational?

5.  Behavioral economists would say that, unlike mainstream economic theory, consumers don't have a "willingness to pay" when they walk into a store or get online to buy something.  Instead  -- what would they say?

6.  Thus far we have discussed four pricing strategies that involve "the psychology of price" -- or ways to use price to "shape" a consumer's perception of value and/or lead them to buy a certain product.  Of the four we have discussed thus far (prestige pricing, price as an indicator of quality, anchoring and using a decoy), which one do you think would be the best one to use for

a.   a brand new product on the market (that does not have any close substitutes) when introduced and why?

b.   an established product with a middle-of-the-road reputation that is trying to reposition the brand such that it has a more upscale value reputation and why?

7.  Do you have any more questions over this material?