Behavioral Economics in Pricing Strategies: A Review of Prospect Theory and Loss Aversion in Consumer Markets

Abstract

Abstract: The objective of this narrative review is to examine how behavioral economics, specifically prospect theory and loss aversion, influences pricing strategies in consumer markets. The study employs a descriptive analysis method to synthesize findings from relevant literature and case studies. The materials for this review were gathered from scholarly articles and industry reports on behavioral economics, pricing strategies, and consumer behavior. The focus is on dynamic pricing models, price framing, discounting, and reference pricing, exploring how these strategies are shaped by consumers' loss aversion and perception of value. The findings reveal that loss aversion is a powerful force driving consumer decision-making. Consumers are more likely to react negatively to price increases than positively to equivalent price reductions, highlighting the importance of framing prices to emphasize gains rather than losses. Dynamic pricing models, commonly used in industries like retail and airlines, adjust prices in ways that minimize the psychological discomfort associated with perceived losses. Price framing and discounts further mitigate the negative effects of loss aversion by shifting consumer focus to perceived savings. Additionally, the study highlights how anchoring consumers to reference prices can influence their perceptions of value, creating opportunities for businesses to manage consumer expectations and drive purchasing decisions. In conclusion, the review demonstrates that integrating prospect theory and loss aversion into pricing strategies offers a valuable approach for aligning business practices with consumer psychology. While these strategies have been effective in various industries, there are challenges related to consumer awareness of pricing tactics and market transparency. Future research is needed to explore how technological advancements and global market trends will continue to shape the intersection of behavioral economics and pricing strategies.