Question

“People perceive how attractive the price of a consumer good is based on its distance from a reference price”- do you agree with the statement? Explain why or why not.

Answer 1

Reference price is the price one is expected to pay as a consumer for a given good or service given the other market conditions.

Also reference price is important because buyers usually give weight to the reference price while buying a good since it is the only way a consumer can judge whether or not the price paid by him was justified.

The statement in the question could be proved with the example.

On festivals, many stores offer huge discounts, which we assume could be 40% in this case. So the consumer would want to buy more of the good, because in reference to the marked price, the price he is paying is 40% less. So higher the discount, more would be the consumer tempted to buy a good. Eg: If a good in non-festive time costs $100 and no discount is offered, but in festive time, the same good is offered at a reference price of $200, with a 45% discount which would cost the consumer more, even then the consumer would be more tempted to buy it at a discount because he perceives that a higher distance from the reference price means that the deal is attractive.

This is the strategy usually used by stores to increase their sales by having a artificially higher reference price which is more than the actual one and then offering discounts on it.

So i agree with this statement that consumers tend to perceive the attractiveness of a price by the distance it has from the reference price.