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Compact case
Case
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Reference no. UVA-QA-0862
Published by: Darden Business Publishing
Originally published in: 2017
Version: 1 September 2017

Abstract

A director of marketing at a major big-box retailer in the United States finds herself overhearing a customer and a lighting specialist discuss the replacement of incandescent and halogen lightbulbs with LEDs in his house. The case provides sufficient data to perform the economic analysis of which lightbulb is more cost effective in terms of net present value. The results are at odds with the student's intuitions. This case uses a durable consumer product of small cost (light bulbs) to illustrate two behavioral patterns, namely, the magnitude effect in discounting and loss aversion. Rationally, replacing an incandescent light bulb for an LED one has positive NPV, even if the incandescent light bulb is still working. Behaviorally, small future cash flows - such as the future cost savings of a more efficient lightbulb - are heavily discounted. Moreover, disposing of a working lightbulb triggers loss aversion of a valuable item. Thus, many individuals will not replace a working light bulb. Even if one needs to buy a new light bulb, many will not find the LED sufficiently economical. In addition to cost, students are challenged to consider other criteria consumers may choose to base their decision. The material works well to explore how discount rates for consumer goods vary across people and choices.

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Abstract

A director of marketing at a major big-box retailer in the United States finds herself overhearing a customer and a lighting specialist discuss the replacement of incandescent and halogen lightbulbs with LEDs in his house. The case provides sufficient data to perform the economic analysis of which lightbulb is more cost effective in terms of net present value. The results are at odds with the student's intuitions. This case uses a durable consumer product of small cost (light bulbs) to illustrate two behavioral patterns, namely, the magnitude effect in discounting and loss aversion. Rationally, replacing an incandescent light bulb for an LED one has positive NPV, even if the incandescent light bulb is still working. Behaviorally, small future cash flows - such as the future cost savings of a more efficient lightbulb - are heavily discounted. Moreover, disposing of a working lightbulb triggers loss aversion of a valuable item. Thus, many individuals will not replace a working light bulb. Even if one needs to buy a new light bulb, many will not find the LED sufficiently economical. In addition to cost, students are challenged to consider other criteria consumers may choose to base their decision. The material works well to explore how discount rates for consumer goods vary across people and choices.

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