Implications of Prospect Theory for the Pricing of Leisure Services

ABSTRACT

Prospect theory evolved in psychology 35 years ago. It transitioned into economics, where it became one of the founding pillars of behavioral economics. This article uses prospect theory to inform explanations of the workings of eight heuristics used in pricing decisions: enterprise fund effect, semantic framing of discounts and premiums, promotional price, bundling and unbundling of services, hyperbolic discounting, endowment effect, sunk cost effect, and odd number pricing. Research is reviewed from the marketing, psychology, economics, and leisure literatures; examples are provided across a wide spectrum of leisure settings; and implications for leisure managers are suggested.

KEYWORDS:

• heuristics
• leisure services
• pricing
• prospect theory

Notes

1 The bullet point examples in the paper which are not referenced were provided by participants in workshops conducted by the author in the past three decades. The individuals who offered them were not identified.

2 This strategy of charging different users a different price for the same service, even though there are no proportional differences in the cost of providing the service, is termed price segmentation in the marketing field and price discrimination in economics. However, both of these terms have exclusionary connotations that are contrary to the inclusiveness which is sought in the delivery of public leisure services. Accordingly, in this context the term differential pricing has been adopted (Howard &Crompton, 1980).

3 A central challenge in public sector pricing is to reconcile the Benefit Principle which directs that costs of a service should be borne by those who benefit from it, with the Ability to Pay Principle which directs that no residents should be excluded because they lack the funds to do so.