Chapter 5

Customer Behavior Aspects of Pricing

Thus far, we have mainly focused on observing how customers respond to different prices and then using this data to estimate models so that price can be optimized. A purely analytical approach to price optimization does not guarantee success, however. What is also needed is to understand why customers react the way they do to promotions and price changes so the changes and promotions can be framed in a way that maximizes customer acceptance. To do so, we now venture into the psychology of pricing.

Before getting into specifics, let us first try a simple mental exercise. Imagine that you are trying out a new restaurant for dinner with a friend or significant other. You decide that a Merlot will provide ...

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