New Evidence Concerning Consumer Price Limits

Anthony D. Cox, Georgia State University
ABSTRACT - The idea that consumers have upper and lower price limits in choosing a brand has both intuitive appeal and empirical support. Several studies have attempted to measure these limits, but few have explored factors which may influence them. This study examines factors which may influence buyers' price limits. The results indicate that these limits are strongly correlated with prices buyers have paid in the past, and that at least lower limits may be shifted by the current range of prices presented to a consumer. These findings have implications both for price setters, and for consumer theorists suggesting how buyers' decision criteria may be shifted as they interact with the marketplace.
[ to cite ]:
Anthony D. Cox (1986) ,"New Evidence Concerning Consumer Price Limits", in NA - Advances in Consumer Research Volume 13, eds. Richard J. Lutz, Provo, UT : Association for Consumer Research, Pages: 268-271.

Advances in Consumer Research Volume 13, 1986      Pages 268-271

NEW EVIDENCE CONCERNING CONSUMER PRICE LIMITS

Anthony D. Cox, Georgia State University

ABSTRACT -

The idea that consumers have upper and lower price limits in choosing a brand has both intuitive appeal and empirical support. Several studies have attempted to measure these limits, but few have explored factors which may influence them. This study examines factors which may influence buyers' price limits. The results indicate that these limits are strongly correlated with prices buyers have paid in the past, and that at least lower limits may be shifted by the current range of prices presented to a consumer. These findings have implications both for price setters, and for consumer theorists suggesting how buyers' decision criteria may be shifted as they interact with the marketplace.

INTRODUCTION

Over the past 30 years, a variety of consumer researchers have suggested that a buyer possesses two price "limits" with respect to a given product category: a maximum expenditure he would be willing to make for such a product, and a minimum price below which he would have prohibitive doubts about the product's quality. (Emery 1970; Gabor and Granger 1966; Monroe 1971; Monroe and Venkatesan 1969; Sherif 1963; Stoetzel 1970). Not only has the concept of upper and lower price limits appealed intuitively to these researchers, but it is consistent with two other bodies of consumer research: the price-perceived quality literature (see e.g. Olson 1977) and studies revealing the importance of non-compensatory rules - particularly the "conjunctive" rule - in consumer brand choice (see e.g. Grether and Wilde 1984).

Almost all previous empirical research on consumer price limits has focused on measurement - assessing individual consumers' price limits, and estimating market-wide frequency distributions of such price limits within specific product categories. Several researchers (e.g. Adam 1970; Monroe 1971) have suggested that the knowledge of such distributions could be a useful tool in managerial price setting. Beyond the issue of measurement, however, another important question regarding price limits has remained largely unexplored: How are these limits formed?

One interesting hypothesis is that a buyer does not bring rigidly formed price limits into the market place, but that these limits are to some extent shaped or shifted by the very range of prices he finds when he gets there. If this hypothesis were true, it would have significant managerial implications, suggesting a firm might be able to shift its customers' price constraints by altering its product assortment or price levels. Such a finding would also alter the interpretation of previous price limits research, particularly those studies (e.g. Monroe 1971; Monroe, Della Bitta and Downey 1977) which have assessed buyers' price limits by having them sort a particular range of prices selected by the researcher.

The purpose of this paper is to explore the hypothesis that consumers' price limits are shaped by the particular prices they encounter in the marketplace. First, relevant research findings from both marketing and psychology will be discussed. Next, the results of an experiment conducted by the author will be reported. Finally, the implications of the findings, both for marketing managers and consumer researchers, will be discussed.

LITERATURE REVIEW AND HYPOTHESES

One indirect piece of evidence regarding the above hypothesis comes from the price-recall literature. Studies have shown that buyers typically have a poor memory for prices previously paid for products, even frequently purchased products (see e.g. Dietrich 1977). Such uncertain recall might cause buyers to rely heavily on the immediate range of prices when judging what constitutes a reasonable or typical price. This effort might be accentuated in inflationary times; even if buyers can recall previous prices, a high inflation rate may make this information seem obsolete, causing them to rely on present prices as a more relevant guide to what is normal.

Some evidence regarding the formation of price limits can also be found in the literature OD human psychophysical judgement. The psychologist Helson (1947) posited that when a subject is asked to judge the magnitude of a stimulus (e.g. the height of another person) his frame of reference or "adaptation level" is partially determined by the average magnitude of the "focal stimuli" (e.g. the heights of the other people currently being judged). This hypothesis has since found considerable empirical support in the work of Parducci and his associates (Parducci 1954, 1956; Parducci and Hohle 1957; Engel and Parducci 1961; Parducci and Perrett 1971; Marsh and Parducci 1977.) It should be noted that Parducci's subjects have usually been asked to judge objects for which they have no meaningful prior experience or frame of reference (e.g. the size of black cardboard squares) and that they have been asked to rate these objects on inherently relativistic semantic differential scales (e.g. "very large," "very small," etc.) It seems likely that these factors would increase subjects' reliance on the current range as a frame of reference. Still, this research has interesting implications concerning the formation of buyers' price limits.

Two studies have extended the Helson/Parducci research stream into the domain of price judgements. Della Bitta and Monroe (1974) presented subjects with a series of prices in either ascending or descending order and asked them to rate each price OD a semantic differential scale ("very expensive," "very cheap," etc.) They found that subjects shown the ascending series tended to rate a given price as more expensive, apparently because it contrasted against the preceding lover prices. Nwokoye (1975) presented subjects with either a high or low price range, and asked them to semantically rate each price in that range. He found that the average dollar value of prices designated "medium" was higher among subjects shown the higher range. While these results are interesting, their generalizability to the formation of price limits is limited by the fact these subjects, like Parducci's, gave purely semantic ratings of prices. Since terms like "very expensive" are inherently relative, a subject may examine the range of stimulus prices as a cue regarding what the researcher considers "very expensive. This does not necessarily mean that this range would alter the price the subject would pay for the hypothetical product.

Most pertinent to the present topic are two studies which have examined the effect of the stimulus range on buyers' self-reported price limits. Sherif (1963) presented subjects with price cards representing prices for hypothetical winter coats, and asked subjects to sort them into categories of "acceptable," "too expensive," and "too cheap." Subjects were given a set of prices ranging either from $5 to $54 or from $5 to $104. Sherif found that subjects' upper and lower price limits were both significantly higher in the group presented with the higher price range. However, the apparent shift in the upper limit is impossible to interpret, since by the nature of the task, sorters of the short series were unable to indicate an upper limit higher than $54. In fact, Sherif mentions that many of the subjects sorting the short range did not even use the "too expensive" category, suggesting they would have specified upper limits higher than $54, had they been able to

Monroe, Della Bitta and Downey (1977) replicated Sherif's experiment. Unlike Sherif, they found no significant price range effect on subjects' lower price limits. There was a statistically significant change in subjects' upper limit; however its theoretical significance was muddied by the fact that their subjects too were constrained in their ability to specify an upper limit.

In summary, while there is considerable indirect research evidence that buyers' price limits may be influenced by the prevailing range of prices, those studies which have directly addressed this issue offer conflicting results and contain methodological limitations which harm their internal validity.

To shed additional light on this phenomenon, the author conducted an experiment designed to overcome some of the methodological limitations of previous research. The research hypotheses guiding the study were as follows:

Hypothesis 1a

Subjects asked to evaluate a series of relatively high prices will specify a higher bottom price limit than subjects asked to evaluate a series of relatively low prices.

Hypothesis 1b

Subjects asked to evaluate a series of relatively high prices will specify a higher upper price limit than subjects asked to evaluate a series of relatively low prices.

The rationales for hypotheses 1a and 1b are discussed extensively above.

Hypothesis 2a

Subjects' lower price limits will be positively associated with the prices they have previously paid for similar merchandise.

Hypothesis 2b

Subjects' upper price limits will be positively associated with the prices they have previously paid for similar merchandise.

These hypotheses are consistent with the contention of Fouile (1970) that buyers' price limits may be based in part on past prices paid. More generally, it is consistent with the research findings of Parducci, et al. that subjects' judgements concerning stimuli are partially anchored by their previous experience with similar stimuli.

Hypothesis 3a

The level of the stimulus price range will exert a stronger influence on the lower price limits of those subjects who have not recently made a purchase in this product category than on those subjects who have made a recent purchase.

Hypothesis 3b

The level of the stimulus price range will exert a stronger influence on the upper price limits of those subjects who have not recently made a purchase in this product category than on those subjects who have made a recent purchase.

These hypotheses are based upon the supposition that subjects who have not purchased the product recently will tend to have less certain recall of the prices to which they were exposed at the time of purchase. Therefore, they may rely more heavily on the current range of prices as a frame of reference.

THE EXPERIMENT

Ninety-seven subjects were selected from four undergraduate business classes at a large midwestern university. A product type was chosen for the experiment (dress slacks) which had been purchased by the large majority of the subjects, male and female. Each subject was given a Large envelope. Inside that envelope was a set of price tags (in random order), three smaller envelopes labeled "too expensive," "too cheap," or "acceptable," and a short questionnaire. The use of three categories is consistent with the majority of previous research in this area (e.g., Emery 1970; Gabor and Granger 1966; Stoetzel 1970).

S's were asked to turn the questionnaire face down, and to arrange the small envelopes with the labels facing up. They were then asked to unclip the price tags, and sort through them as if they were prices for pairs of slacks. They were told that they were not required to use all of the categories (labeled envelopes) provided for them, or to have an equal number of tags in every category. When the S's were finished sorting, they were asked to place the tags in the appropriate envelopes. In order to avoid the problems of the Sherif and Monroe experiments, the S's were then told that if they had not placed any price tags in the "too expensive" envelope, to write on the front of that envelope the highest price they would pay for a pair of slacks. They were given similar instructions regarding the "too cheap" envelope. When this was completed, they were told to fill out the questionnaire (in which they were asked to state when they last purchased a pair of dress slacks, and what price they paid), place all materials back into the large envelope, and hand it forward.

Half of the envelopes contained prices ranging from $2 to $66, at two dollar intervals, and the other half contained prices from $16 to $60, at two dollar intervals. The two price ranges were randomly assigned to subjects (by shuffling the envelopes before they were handed out). Both ranges of prices contained the price-points most frequently purchased by this subject population (according to a telephone survey of local merchants ranging from K Hart to expensive specialty stores). The subjects showed little interest in the experimental materials received by their neighbors, and there was no evidence that they knew there were two different sets of prices distributed.

RESULTS

The data were analyzed in an analysis of covariance, with "stimulus price range" and "recency of purchase" entered as dichotomous factors (the latter variable was split at the sample median) and "price last paid" entered as a metric covariate. The unadjusted cell mean;s are shown in the table.

The analysis of subjects' lower price limits supported Hypothesis 1a: Subjects presented with the higher range of prices specified an average lower price limit of $19.53, whereas those presented with the lower range indicated a mean lower limit of $16.21. This difference was significant at well beyond the .01 level (F[1,92] = 10.08). Thus it appears that the subjects did tend to use the stimulus prices as a frame of reference when deciding what was an unacceptably low price. This finding is consistent with that of Sherif (1963), but inconsistent with that of Monroe (1977), who found no stimulus-range effect on subjects' lower price limits.

TABLE

CELL MEANS FOR BUYERS' REPORTED PRICE LIMITS

Such conflicting experimental results generally lead researchers to logic for contingency factors, or variables which may moderate the treatment's effect. One potential moderator (recency of purchase) was addressed in this study in t-h-e form of Hypothesis 3a. Unfortunately, this hypothesis was not supported by the analysis. The interaction of recency of purchase and price range on lower limits was not statistically significant at even the .25 level (F[1,92] - .608), nor was there a significant main effect of recency of purchase (F[1.92] = .123).

Hypothesis 2a was strongly supported by the analysis. The price last paid accounted for 32% of the squared variance in subjects' lower price limits, statistically significant at the .001 level (F[1,92] = 48.54). This confirms the world in both consumer behavior and in psychophysics concerning the effects of past experience with similar stimuli on subjects' judgements.

A comparable set of analyses were performed on subjects' upper price limits. Hypothesis 1b was not confirmed; the effect of the stimulus price range on subjects upper price limits was not statistically significant (F[1,92] = 1.8). However, it should be noted that the sample difference was in the predicted direction. Subjects presented with the series of high prices specified a mean upper price limit of $35.96, while those shown the low series indicated an average upper limit of $33.43. It is interesting to note that there was considerably more total variance in subjects' upper price limits than in their lower limits ( the standard deviations were $7.62 and $5.62, respectively). This tended to inflate the denominator of the F ratios, possibly masking real effects of the treatments. It would be useful in future studies to try to discover variables which might explain for some of this variance. Such correlates would not only be interesting in their own right, but they could be used as covariates to increase the power of statistical tests examining the effects of the stimulus price range on subjects' upper Price limits.

As was the case with lower price limits, the Hypothesized interaction of recency of purchase and price range on upper limits was not even weakly supported, (F[1,92] = .047) nor was there a significant main effect of purchase recency (F[1,92] = 1.1). However, the analysis did strongly support Hypothesis 2b, indicating once again that buyers' price limits are closely related to the prices they recall having paid in the past (F[1,92 - 52.62, p < .001).

CONCLUSION

An understanding of consumer price limits is important both to those who must set prices, and those who wish to better understand the process of consumer choice. This paper has tried to offer some insight into how consumers form these limits. The experimental results reported above suggest two variables which may be important: The prices consumers have paid in the past, and (though the evidence on this is less consistent) the range of products' prices at the point of purchase. The role of the latter variable is of particular interest, for at least two reasons. If the range of prices subjects are asked to judge can influence their price limits, this suggests that studies which have measured price limits by having subjects sort a particular range of prices (e.g. Monroe 1971) may have inadvertently altered that which they set out to measure. A practical implication of this result is that marketing managers may be able to shift consumers' price limits by altering their product assortment or prices. For example, a retailer might add a $500 suit to its assortment in order to make a $400 suit appear less extravagant to its customers (or perhaps to discourage theM from buying $100 suits). However, this effect needs to be examined ia a more naturalistic setting.

There are several directions which future research should take. Future studies should test the generaliability of these findings, by examining other subject populations and product classes, and by increasing the realism of the task - presenting subjects with actual products, asking them to make actual purchase commitments, and so forth.

There are also other factors whose effects on consumers' price limits might be examined. One such factor is consumers' involvement - both with the particular product class, and with prices in general. Research in social psychology (see Sherif and Hovland 1961, p. 129; Fishbein and Ajzen 1975, p. 457) has indicated that subjects who are highly involved with a class of stimuli are likely to consider a much narrower latitude of stimuli as "acceptable." This suggests that product involvement may have a main effect on price limits (narrowing the range of acceptable prices) and also may interact with the prevailing price range (highly product-involved subjects might be less susceptible to price-range influences in forming their judgments). Both of these effects are worthy of future investigation. It is also possible that there may be demographic (e.g., gender) and behavioral (e.g., type of stores patronized) factors which are either directly or indirectly related to consumers' price limits.

In summary, this study generates more questions than it answers. However, the phenomenon of consumer price limits is sufficiently interesting, both managerially and theoretically, to justify future research directed at answering these questions. The author is currently engaged in such research.

REFERENCES

Adam, Daniel (1970), "Consumer Reactions to Price," in Pricing Strategy, eds. Bernard Taylor and Gordon Wills, Princeton: Brandon Systems Press. 89-97.

Della Bitta, Albert, and Kent Monroe (1974), "The Influence of Adaptation Level on Subjective Price Perceptions," in Advances in Consumer Research, Vol. 1, eds. Scott Ward and Peter Wright, Association for Consumer Research, 359-369.

Dietrich, R. (1977), "Poor Price-Quiz Scores Give Shoppers No Cause for Pride," Progressive Grocer, January, 33.

Emery, Fred (1970), "Some Psychological Aspects of Prices, in Pricing Strategy, eds. Bernard Taylor and Gordon Wills, Princeton: Brandon Systems Press, 89-97.

Engel, G. and A. Parducci (1961), "Value of Background in the Specification of the Stimulus for Judgement," American Journal of Psychology, 74, 569-575.

Fishbein, M. and I. Ajzen (1975), Belief, Attitude, Intention, and Behavior; An Introduction to Theory and Research, Reading, Massachusetts: Addison-Wesley.

Fouile, Pierre (1970), -The Subjective Evaluation of Price," in Pricing Strategy, eds. Bernard Taylor and Gordon Wills, Princeton: Brandon Systems Press, 89-97.

Gabor, Andre and C.W.J. Granger (1966), "Price as an Indicator of Quality: Report of an Inquiry," Economica, 46 (February), 43-70.

Grether, Davit and Louis Wilde (1984), "An Analysis of Conjunctive Choice: Theory and Experiments," Journal of Consumer Research, 10 (March), 373-385.

Helson, H. (1947), "Adaptation Level as Frame of Reference for Prediction of Psychophysical Data," American Journal of Psychology, 60, 1-25.

Marsh, B. and A. Parducci (1977), "Natural Anchoring at the Neutral Point of Category Rating Scales," Journal of Experimental and Social Psychology, 14, 193-204.

Monroe, Kent (1971), "Measuring Price Thresholds by Psychophysics and Latitudes of Acceptance," Journal of Marketing Research, 8 (November), 460-464.

Monroe, Kent, Albert Della Bitta and Susan Downey (1977), "Contextual Influences on Subjective Price Perceptions," Journal of Business Research, 5 (December), 277-291.

Monroe, Kent, and M. Venkatesan (1969), "The Concepts of Price Limits and Psychophysical Measurement: A Laboratory Experiment, Proceedings, Fall Conference of American Marketing Association, 345-51.

Nwokoye, N. (1975), "Subjective Judgements of Price: The Effects of Price Parameters on Adaptation Levels," AMA Combined Proceedings, 545-548.

Olander, Folke (1970), The Influence of Price on the Consumer's Evaluation of Products and Purchases," in Pricing Strategy, eds. Bernard Taylor and Gordon Wills, Princeton: Brandon Systems Press, 89-97.

Olson, Jerry (1977), "Price as an Information Cue: Effects on Product Evaluations, in Consumer and Industrial Buying Behavior, eds. Arch Woodside, Jagdish Sheth and Peter Bennet. New York: North-Holland.

Parducci, A. (1954), "Learning Variables in the Judgement of Single Stimuli, Journal of Experimental Psychology, 48, 25-30.

Parducci, A. (1956), "Direction of Shift in the Judgement of Single Stimuli, Journal of Experimental Psychology, March, 169-178.

Parducci, A. and R. hohle (1957), Restriction of Range in the Judgement of Single Stimuli," American Journal of Psychology, 70, 272-275.

Parducci, A. and B. Perrett (1971), "Category Rationing Scales: Effects of Relative Spacing and Frequency of Stimulus Values," Journal of Experimental Psychology Monograph, 89, 427-452.

Sherif, C. (1963), Social Categorization as a Function of Latitude of Acceptance and Series Range," Journal of Abnormal and Social Psychology, 2, 148-156.

Sherif, M. and C. Hovland (1961), Social Judgement: Assimilation and Contrast Effects in Communication and Attitude Change, New Haven: Yale University Press.

Stoetzel, Jean (1970), "Psychological/Sociological Aspects of Prices, in Pricing Strategy, eds. Bernard Taylor and Gordon Wills, Princeton: Brandon Systems Press, 89-97.

----------------------------------------