Theoretical and Methodological Developments in Pricing

Kent B. Monroe, Virginia Polytechnic Institute and State University
ABSTRACT - While reviewing four papers on new developments in pricing, this paper offers several suggestions for further development on the issue of consumer response to price. The issues are organized according to theoretical and methodological issues.
[ to cite ]:
Kent B. Monroe (1984) ,"Theoretical and Methodological Developments in Pricing", in NA - Advances in Consumer Research Volume 11, eds. Thomas C. Kinnear, Provo, UT : Association for Consumer Research, Pages: 636-637.

Advances in Consumer Research Volume 11, 1984      Pages 636-637

THEORETICAL AND METHODOLOGICAL DEVELOPMENTS IN PRICING

Kent B. Monroe, Virginia Polytechnic Institute and State University

ABSTRACT -

While reviewing four papers on new developments in pricing, this paper offers several suggestions for further development on the issue of consumer response to price. The issues are organized according to theoretical and methodological issues.

THEORETICAL ISSUES

Each of the papers in this session were, in some way, concerned with how consumers respond to price. Although three of the papers (Ahtola 1984; Shugan 1984; Zeithaml 1984) are conceptual in nature, no paper directly addresses this issue. Seemingly, there is recognition that individual buyers may respond differently to price than the traditional inverse price-quantity demanded relationship. While Zeithaml (1984) makes no mention of this inverse price-quantity demand relationship, each of the other three papers do in one way or another. Yet, there are no individual buyer departures from the inverse price-quantity relationship, then the traditional model is sufficient and there is little need to conceptualize other relationships. However, in the Olson and Jacoby (1977) schema adapted by Zeithaml (1984), it is clear that there is a difference between the perfect information processing buyer assumed in the traditional model and the imperfect information processing buyer assumed by most consumer researchers. That is, buyers neither have perfect information about price and product alternatives, nor are they perfect information processors.

The model developed by Shugan explicitly recognizes :his lack of perfect information by incorporating buyers who are quality conscious. That is, some buyers will demand more of a higher-quality product as long as price does not exceed some upper limit or threshold. His type three consumers desire quality but are unable to detect the quality. Hence, these buyers might use price as an indicator of the level of quality. However, Shugan is interested more in deriving conclusions about how firms and markets behave if some buyers are quality conscious than in offering propositions on how buyers respond to price. His conclusion that the quality-price relationship is non-linear is an important proposition, but it is a conclusion about the market, not about individual buyers.

In an abstract manner, Ahtola introduces the notion of "give" and "get". That is, price is what the consumer has ,o give in order to get the product. However. this notion is similar to Monroe's (1979) concept of perceived value = (perceived benefits /price. Moreover, Shapiro and Jackson (1978) and Gross (1978) offer a similar conceptualization. The problem with Ahtola's conceptualization is he does not address how buyers know that they get. If buyers do not possess perfect information about choice alternatives, then they must make some inferences from the information cues available. and, although ne discusses the concept of quality, he does not relate this discussion to the issue of price and perceived quality, nor to the give and get concepts.

Somewhat contrarily. Dickson and Sawyer illustrate an approach for estimating price elasticity of demand. Implicitly assuming frequently purchased, branded products, they assume an inverse price-quantity relationship-and reject the possibility that buyers may refrain from purchasing if the price is too low. (Ahtola makes a similar statement.) Essentially, they also embrace the perfect information assumptions mentioned above. For example, they make this statement: "Consumers can almost always directly assess the quality of goods by inspection or by in-store trial. The great majority of buyers are aware of the existence of manufacturers' warranties, regulated minimum quality performance standards...and retailers' responsibility to sell goods of merchandisable quality." It would be helpful if they would document this "fact" of consumer knowledge and capability since most consumer research assumes buyers are not so knowledgeable and objective in their purchasing behavior. Moreover, the price elasticity procedure they illustrate actually "demands" that individual buyers respond according to the assumed inverse price-quantity relationship.

The problem is that no paper offers a conceptualization of how individual buyers respond to price. Assumptions are made about the role of price in buyer behavior, but these assumptions do not utilize the distinction between objective and subjective price articulated by Jacoby and Olson (1977) and used by Zeithaml (1984). The prevailing cognitive approach to buyer behavior and to buyers' response to price is ignored except by Zeithaml.

AN INCOMPLETE CONCEPTUAL MODEL

Monroe and Krishnan (1984), using Monroe's (1979) conceptualization on perceived value provide an incomplete model relating price, perceived quality, and perceived value to willingness to buy. Moreover, the acceptable price range concept is utilized to tie the concepts together.

As Ahtola postulates, price is assumed to represent the amount of sacrifice a buyer must make to obtain a product (the "give" component). But, also as Ahtola suggests, price may be used to influence the perception of product quality (part of the "get" component). In the "give" situation, the higher the price, ceteris paribus, the greater will be the sacrifice the buyer must make, and therefore, the less will be the inclination to purchase the higher-priced product. In the "get" situation. the higher the price, the greater will be the perceived quality of the product and, ceteris paribus, the greater will be the inclination to purchase the higher-priced product. (In the sense of Shugan's formulation, the "give" situation represents the type 1 consumer, while the "get" situation represents the type 2 consumer. However, in the imperfect information model, it is postulated that the buyer experiences both types of perceptions.)

Again, as suggested by Ahtola, the buyer in a purchase situation makes a value judgement by trading off the utility of the sacrifice against the utility inferred from the perception of quality. If the utility inferred from the perception quality is greater than the utility sacrificed, then there is a positive perception of value. The more positive the buyers' perception of value, the greater will be the buyers' willingness to purchase.

To understand the relationship between perceived quality and willingness to buy, it is necessary to introduce the concept of the acceptable price range. It is postulated that buyers, generally, have a range of acceptable prices for considered purchases. Thus, buyers may not purchase a product when price is perceived to be too high, nor when price is perceived to be too low. Therefore, the acceptable price range concept provides the implication that perceived value is positive when prices are acceptable. However, perceived value will be positive only when the utility inferred from the perception of quality is greater than the utility sacrificed by paying the price. The figure illustrates the proposed relationship between price and perceived value when price serves both as a repellant and as an attraction to buyers.

In this conceptualization, the stance taken by both Dickson and Sawyer, and Ahtola that for frequently purchased branded goods, perception of quality is constant relative to price implies that perceived value is monotonically inversely related to price. This relationship is also shown in the figure. Thus, in this simple conceptualization, we have derived competing hypotheses for a behavioral response to price. What is needed now is the design of a research effort pitting the hypotheses against each other (a form of strong inference).

FIGURE 1

THE RELATIONSHIP BETWEEN PRICE AND PERCEIVED VALUE

METHODOLOGICAL ISSUES

Zeithaml correctly points out that a necessary requirement to test conceptualizations or buyers' response to price is to develop better conceptual and operational definitions of the relevant constructs. Her paper readily documents the problem of relying on the literature and to define the concept of price consciousness. Essentially. the definition offered includes virtually every form of buyer response to price: price images price perceptions, price knowledge, price acceptability, price importance, perceived value. Thus, it is quickly realized that consumer researchers must first decide what they intend the concept price consciousness to mean, and then to delimit this concept from other concepts.

Once the concepts are carefully defined, then as noted above, they must be conceptually related to each other and to appropriate concepts of buyer response (dependent variables). The third step then would be to develop the corresponding theory between the constructs and their empirical indicators. Finally, appropriate measures of these indicators must be developed and validated. In general, previous research on behavioral response to price has rarely offered a conceptual model, and even more rarely, justified the empirical indicators or measures used. Hopefully, the maturing of consumer research in these directions will provide the impetus for improving the quality of research in the area of buyer response to price.

REFERENCES

Ahtola, Olli T. (1984), "Price as 'Give' Component in an Exchange Theoretic Multicomponent Model" in T. Kinnear (ed.) Advances in Consumer Research, Vol. 11 Ann Arbor, MI: Association for Consumer Research.

Dickson, Peter R. and Alan G. Sawyer (1984), "Entry/Exit Demand Analysis." in T. Kinnear (eds.), Advances in Consumer Research, Vol. 11, Ann Arbor, MI: Association for Consumer Research.

Gross, Irwin (1978), "Insights From Pricing Research," in E. L. Bailey (ed.), Pricing Practices and Strategies, New York: The Conference Board, Inc., 34-49.

Jacoby, Jacob and Jerry C. Olson (1977), "Consumer Response to Price: An Attitudinal, Information Processing Perspective," in Y. Wind and M. Greenberg (eds.), Moving Ahead With Attitude Research, Chicago: American Marketing Association, 73-86.

Monroe, Kent 3. (1979), Pricing: Making Profitable Decisions, New York: McGraw-Hill Book Co.

Monroe, Kent B. and R. Krishnan (1984), "The Effect of Price on Subject Product Evaluations," in J. Jacoby and J. Olson (eds.), Consumer Perception of Merchandise and Store Quality, Lexington, MA: D. C. Heath and Co. (forthcoming).

Shapiro, Benson P. and Barbara B. Jackson (1978), "Industrial Pricing to Meet Customer Needs." Harvard Business Review, 54 (November-December), 119-127.

Shugan, Steven M. (1984), "Price-Quality Relationships," in T. Kinnear (ed.). Advances in Consumer Research, Vol. 11, Ann Arbor, MI: Association for Consumer Research.

Zeithaml, Valarie A. (1984), "Issues in Conceptualizing and Measuring Consumer Response to Price," in T. Kinnear (ed.), Advances in Consumer Research. Vol. 11, Ann Arbor, MI: Association for Consumer Research.

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