The Application of the Anchoring Effect in Pricing, Consumer Purchases and Auctions

Abstract

As an important theory in behavioral economics, the anchoring effect has been widely used in the analysis of economic market behavior in recent years. And scholars' research on this effect also involves all aspects of the economic field, which shows how anchoring has a significant impact. It greatly influences how people behave and has repercussions for all types of decision-making processes. Using the method of case study, this paper discusses and analyzes the definition, types, mechanisms, importance and especially the applications of anchoring. It initially reviews previous anchoring applications in pricing, consumer purchases and auctions. Based on the former research, more modified applications are introduced. First of all, when sellers are pricing, their subtle utilization of stereotypes, namely, reference pricing, is demonstrated. It is a stable and adaptable strategy that would be effective in helping firms earn more profits. Then, based on an experiment focusing on consumer purchases and decision-making bias, potential factors leading to and influencing anchoring are discussed, which may enable consumers to be clearly aware of current conditions and therefore come up with methods protecting themselves from being affected. Lastly, the anchoring effect can also explain the major mechanisms of auctions in today’s world. Based on that, the reason why classic auctions often begin with unimpressive initial reference prices but end with higher prices when deals are made is figured out. The conclusions drawn from this analysis can help consumers and investors avoid being affected by invalid information and behave more efficiently when they are making decisions.