ECON 325

In Class Exercise Six - Behavioral Economics and the Psychology of Pricing - Part Two

1.     Bob sells a specialty cocktail known as High Berry.  High Berry basically has three different types of customers.  First, it is a very sweet, easy to drink alcoholic beverage.  So it appeals to women who just want a good tasting drink that goes down easily.  Second, it appeals to people who want a drink that includes high quality rum (which it does).  And lastly, because it is serviced in a martini glass, it appeals to “snobs” who want to look like they are drinking a fancy martini.

Draw the demand curve for High Berry – with three different price thresholds.

Now draw a supply curve on the same graph such that it intersects at the second price threshold.  If Bob does not use price discrimination (that is he only sells the drink for one price) – would the intersection of your supply and demand curve be the price he should charge? 

Can you criticize the demand curve you created above?  How might you look at the three different customer groups – and demand – in a different way?

Can you give any advice about how Bob should price his drink (given the strategies we discussed in class)?

2.     What are two arguments that we discussed that explain why people will buy more if the price of the good ends with a 9?

3.     What is the basic idea behind “prospect theory?”

4.     How does prospect theory explain the success of a “cash back” pricing scheme?

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