According to prospect theory, what strategy will firms typically employ with regard to pricing and packaging of their goods, when faced with rising production costs?

Question

Quizplus · Accepted Answer

Prospect theory suggests that firms are likely to adopt strategies that minimize the negative perception of price increases among consumers. Reducing package sizes while keeping prices constant, known as "shrinkflation," is a common tactic. It subtly increases the per unit cost without the overt negativity of a price hike, leveraging consumer inattention to package size over price changes.

According to Prospect Theory, What Strategy Will Firms Typically Employ