According to Richard Thaler, a Utility Graph is used in business by economists to measure the usefulness obtained by a certain consumer from a certain good. However, to understand the usefulness, the utility graph must be used accurately and correctly. Utility graph is defined as indifference curve that can make connections at different points in a graph that represent different quantities of goods. Utility graph has many features that make it different from other graphs. Some of the features include being convex to the origin. This occurs because, when trying to understand usefulness whenever satisfaction decreases, customers sacrifice also becomes less. Second, utility curve slopes downwards from the left side to the right side. Thirdly, utility graphs have a negative slope. This means that whenever a customer has limited income, there is increased consumption of a given good, but consumption will only occur where another product experience reduced consumption hence offering customers a good level of satisfaction.
Principals of Prospect Theory
Prospect theory differs from the expected utility theory in different ways. One of the various ways is that while prospect theory replaces the notion utility with value, where the theory will use utility only when referring to the net wealth, the value is defined regarding gain and losses. Additionally, prospect theory can be applied in explaining some illogical behaviors in finance and value gained through extra money.
Combinations of Gains and Losses Offered By Richard Thaler
There are four combination gains offered by Richard Thaler. The first combination is multiple gains, and it says that whenever a given outcome is valued separately, results are greater that when valued jointly. Second, multiple losses describe preferred, and it means that Christmas gifts need to be wrapped in separate boxes. Thirdly mixed gained combination indicate that losses functions tend to be steeper than the gain functions. Hence integration is preferred, and lastly, mixed loss segregation is preferred where the outcome is a mixed loss.
Promotion or marketing offer in retail that demonstrates good application of two losses/gain integration-segregation combination
Through these promotions, consumers have the ability to combine losses. The retailers of the two products are not reducing the prices of their products. However they are giving extra items to the consumers. Hence the cost of the extra item given is added to the other commodities being purchased. The products are expensive and thus, giving them free may create losses for the seller and reducing the prices may interfere with customer perception about the quality. Losses are integrated by giving another item but adding the cost to the larger purchase. Promotion or marketing offer in retail that demonstrates good application of two losses/gain integration-segregation combination
The above promotions had a wrong application of segregate gain principle where whenever a customer buys the Tropicana drink or Oreo, he or she get the same product free. Additionally, after buying the product, there are coupons that will include the customer in another offer. The retailers of these products used the promotion badly because they should have concentrated on one dimension. The dimensions include whether to give a free Tropicana drink or Oreo to a customer who purchases or to reduce the price of the products or to give the coupon to customers who buy the drink so that they can qualify for the promotion. The retailers of the two products can improve the appeal of the promotions using the Richard Thaler segregate gain principle to ensure there is price control, so which will give them competitive advantage mostly now where there is a hike in food prices.