BACHELOR THESIS Interrelationships between Behavioural Economics and Consum- ers’ Decision-making with emphasis on Pricing Strategies Souvislosti behaviorální ekonomie a spotřebitelova rozhodování s důrazem na strategii oceňování STUDY PROGRAMME Economy and Management FIELD OF STUDY Management and Economy of an Industrial Enterprise SUPERVISOR Ing. Robin Maialeh, Ph.D. KNOROVÁ KRISTÝNA 2018 KNOROVÁ, Kristýna. Interrelationships between Behavioural Economics and Consumers’ Decision-making with emphasis on Pricing Strategies. Prague: CTU 2018. Bachelor thesis. Czech Technical University in Prague, Masaryk Institute of Advanced Studies. Declaration I hereby declare that I have compiled this final thesis on my own and all the quoted literature as well as other sources used in the thesis are listed in the bibliography. The electronic copy of the thesis is identical with the hard-bound copy. I approve that this diploma thesis is pub- lished pursuant to Section 47b Act No.121/2000 Coll., on Higher Education and on the amendment and modification of other acts (the Higher Education Act), as amended. In Prague: 18. 05. 2018 Signature: Acknowledgement I would like to thank my thesis supervisor Ing. Robin Maialeh, Ph.D. for the support, time, knowledges, patience and valuable advices. He was always willing to help when I ran into a trouble or had a question about my writing and steered me in the right direction. I also must express my deep gratitude to my parents and to my beloved friends for their unfailing support and encouragement throughout my years. The accomplishment would not be possible with- out them. Thank you. Abstract The thesis deals with the issue of consumers’ decision-making based especially on behav- ioural economics and behavioural pricing strategies. The thesis aims to review relevant lit- erature regarding the topic, examine correlations between behavioural pricing and consumer decision-making and analyse pricing strategy of a particular company, in this case, Apple, Inc., with emphasis on behavioural pricing. The method is interpretative study and price analysis, since the topics is almost completely theoretical. In conclusion, the analysis re- vealed the way a company sensitively uses insights from behavioural economics and also the positive influence of behavioural pricing on revenue growth. Key words Behavioural economics, pricing strategies, behavioural pricing, consumers’ decision-mak- ing Abstrakt Bakalářská práce se zabývá problematikou ovlivňování rozhodování spotřebitele založené na behaviorální ekonomii a behaviorální cenové strategii. Cílem práce je přezkoumat pří- slušnou literaturu týkající se tématu, prověřit vztah mezi behaviorálním oceňováním a roz- hodováním spotřebitele a analyzovat cenovou strategii konkrétní společnosti, v tomto pří- padě Apple, Inc. Zvolená metoda je studie a cenová analýza, neboť téma je převážně teore- ticky orientované. V závěru analýza poukázala na spojitost mezi zvýšením obratu a behavi- orálním oceňováním. Klíčová slova Behaviorální ekonomie, cenová strategie, behaviorální oceňování, rozhodování spotřebitele List of Abbreviations ASP: Average Selling Price EUR: European Monetary Unit MAP: Minimum advertised price MSRP: Manufacturer Suggested Retail Price USD: United States Dollar VAT: Value Added Tax Table of Contents Introduction .......................................................................................................................... 6 1 CHAPTER Behavioural Economics ........................................................................... 8 1.1 Behavioural Economic ........................................................................................... 8 1.2 Historical context ................................................................................................... 9 1.3 Prospect theory .................................................................................................... 10 1.4 Decision-making systems .................................................................................... 12 1.5 Decision-making biases ....................................................................................... 13 1.5.1 Cognitive biases ............................................................................................... 14 1.5.2 Heuristics ......................................................................................................... 15 1.5.3 Anchoring ........................................................................................................ 15 1.5.4 Loss Aversion .................................................................................................. 16 1.5.5 Framing ............................................................................................................ 17 1.5.6 Questioning rationality and decision-making .................................................. 17 1.5.7 Bounded rationality .......................................................................................... 18 1.5.8 Irrational behaviour and decoy effect .............................................................. 19 2 CHAPTER Pricing Strategies ................................................................................... 24 2.1.1 Introduction ...................................................................................................... 24 2.1.2 Pricing and price .............................................................................................. 24 2.1.3 Value ................................................................................................................ 25 2.1.4 Pricing strategies .............................................................................................. 25 2.1.5 Cost-based pricing ........................................................................................... 25 2.1.6 Value-based pricing ......................................................................................... 26 2.1.7 Penetration pricing ........................................................................................... 26 2.1.8 Skimming pricing ............................................................................................ 27 2.2 Behavioural pricing strategies ............................................................................. 27 2.2.1 Charm pricing .................................................................................................. 27 2.2.2 Irrational Value (Prestige/Premium pricing strategy) ...................................... 28 2.2.3 Power of free .................................................................................................... 29 2.2.4 Hyperbolic discounting .................................................................................... 31 2.2.5 Pain of paying .................................................................................................. 32 3 CHAPTER Analysis of pricing strategies ................................................................ 35 3.1 Introduction .......................................................................................................... 35 3.2 History ................................................................................................................. 36 3.3 Behavioural segmentation .................................................................................... 37 3.3.1 Segmentation based on loyalty ........................................................................ 37 3.3.2 Purchase behaviour .......................................................................................... 38 3.4 Pricing models ..................................................................................................... 39 3.4.1 Price maintenance ............................................................................................ 40 3.4.2 Skimming price strategy .................................................................................. 40 3.4.3 Price discrimination ......................................................................................... 41 3.5 Behavioural pricing and strategies ....................................................................... 44 3.5.1 Pain of paying .................................................................................................. 44 3.5.2 Charm pricing .................................................................................................. 45 3.5.3 Anchoring and reference prices ....................................................................... 46 3.5.4 Prestige pricing ................................................................................................ 49 3.5.5 Decoy effect ..................................................................................................... 57 Discussion .......................................................................................................................... 61 Conclusion ......................................................................................................................... 64 Bibliography ...................................................................................................................... 70 List of Tables and Figures ................................................................................................ 71 Evidence výpůjček ............................................................................................................ 72 Introduction Behavioural economics is a field of economics concerning topics of consumers' decision-