Special Session Summary Consumer Responses to Unexpected Price Changes: Affective Reactions and Mental Accounting Effects

Amar Cheema, University of Colorado at Boulder
Dilip Soman, Hong Kong University of Science and Technology
[ to cite ]:
Amar Cheema and Dilip Soman (2002) ,"Special Session Summary Consumer Responses to Unexpected Price Changes: Affective Reactions and Mental Accounting Effects", in NA - Advances in Consumer Research Volume 29, eds. Susan M. Broniarczyk and Kent Nakamoto, Valdosta, GA : Association for Consumer Research, Pages: 342-343.

Advances in Consumer Research Volume 29, 2002     Pages 342-343

SPECIAL SESSION SUMMARY

CONSUMER RESPONSES TO UNEXPECTED PRICE CHANGES: AFFECTIVE REACTIONS AND MENTAL ACCOUNTING EFFECTS

Amar Cheema, University of Colorado at Boulder

Dilip Soman, Hong Kong University of Science and Technology

Research in marketing has provided several ways of thinking about how consumers use price information in making purchase decisions. We have considerable evidence to support the following ideas: 1) Consumers form category-specific budgets that dictate how much they can spend on any product category, 2) Their purchase decisions are driven by the available (well-defined) budgets, 3) Consumers have a "reference price" expectation for most purchases, and 4) Price deviations in the form of discounts or coupons have a significant effect of consumer decision-making. These findings suggest a fairly stationary set of purchase and consumption decisions given a price expectation and a set of budgeting rules. The papers in this session asked the questionBwhat happens when the consumer gets an unexpected price discount?

In the first presentation (Pleasant Surprises: Consumer Response To Unexpected In-Store Coupons), Heilman, Nakamoto and Rao looked at the affective response of "surprise" on receiving an unexpected in-store coupon and its effects on the shopping basket. These "surprise" coupons may include electronic shelf coupons and peel-off coupons found on product packaging, to name a few. In contrast to the extant literature, they examined the impact of surprise coupons not on brand choice, but rather on the total basket of purchases made by grocery store customers. They hypothesized that a surprise coupon will increase the number of unplanned purchases made on a shopping trip and they predicted where in the grocery store these unplanned purchases would come from. The results of an in-store experiment, a survey study and secondary data supported their hypotheses.

The finding that an unexpected in-store saving will translate into a larger shopping basket is also a feature in the second presentation (The Mental Accounting of Price Shocks: The Effect of Unexpected Price Changes on Cross-Category Purchase Patterns) by Janakiraman, Meyer and Morales. This paper focused on the mental accounting of price shocks in general (i.e. both unexpected price increases and decreases). The presentation argued that price shocks may alter the illusory liquidity of consumers: unanticipated price increases suppress consumers’ tendencies to purchase discretionary goods, while unanticipated price decreases enhance it. The presentation featured data from a computerized grocery-shopping simulation that supports these hypotheses.

In the third presentation (Phantom Gains and Losses: The Effects of Paper Income Changes on Spending and Consumption Decisions), Cheema and Soman presented a mental accounting framework to understand the effects of "phantom" changes in incomeBchanges in purchasing ability that arise as a result of various environmental factors like unexpected price changes or changes in the paper value of assets. They presented the results of two studies showing how consumption and spending decisions are affected by such phantom changes, and that consumer motivation and the permanence of the change moderates these effects.

At the conclusion of the three presentations, Steve Hoch pointed out that studies should also look at the budgets of shoppers who receive these unexpected price changes. Also, what is it that increases the effectiveness of an in-store promotionBis it the unexpectedness, or some other factor?

 

"PLEASANT SURPRISES: CONSUMER RESPONSE TO UNEXPECTED IN-STORE COUPONS"

Carrie Heilman, Kent Nakamoto, Ambar Rao

The effect of coupons, such as freestanding inserts (FSIs) and those in newspapers and magazines, on brand choice has been well documentedBsee Blattberg and Neslin (1990) for a survey of key studies. This paper investigates the impact of a relatively new type of coupon, the in-store instant coupon. These "surprise" coupons, which include electronic at-shelf coupons and peel-off coupons found on product packaging, are unanticipated coupons encountered by a customer while in the grocery store that are intended for use on that particular shopping trip. In contrast to the extant literature, we examine the impact of surprise coupons not on brand choice, but rather on the total basket of purchases made by grocery store customers. We hypothesize that the use of an unexpected, in-store coupon will increase the size of a consumer’s shopping basket by increasing the number of unplanned purchases made on that shopping trip. Our conceptual model draws insights from the behavioral literature and suggests that when consumers use in-store instant coupons, they experience 1) a psychological income effect and/or 2) an elevated mood state, either of which may cause an increase in the number of unplanned purchases. We then make predictions as to the type of these unplanned purchases. We argue that a priming and/or memory effect may moderate the psychological income effect and/or the mood effect described above, resulting in an increase of unplanned purchases from any of the following four categories; 1) another product promoted on price, 2) an impulse or "treat" item, 3) a product that is cognitively related to that which was promoted, or 4) a product shelved in close proximity to that which was promoted. We report the results an in-store experiment to test these hypotheses and find that surprise coupons do increase consumers’ basket size (by roughly 12%), both in terms of items purchased and dollars spent. This hypothesis is also supported using the Stanford Market Basket Data set. Our experiment also shows that these incremental purchases are likely to be "treats", products that are cognitively related to that which was promoted, and products shelved in close proximity to that which was promoted.

 

"THE MENTAL ACCOUNTING OF PRICE SHOCKS: THE EFFECT OF UNEXPECTED PRICE CHANGES ON CROSS-CATEGORY PURCHASE PATTERNS"

Narayan Janakiraman, Robert Meyer, Andrea Morales

A rarely challenged tenet of economic theory is that as long as consumers do not face liquidity constraints, goods satisfying different fundamental needs not should exhibit significant cross-price elasticities. Mental accounting, however, provides a theoretical mechanism by which this assumption may be violated when the posted prices of goods unexpectedly depart from historical or expected levels. Specifically, expected price shocks may alter the illusory liquidity of consumers, such that unanticipated price increases suppress consumers’ tendencies to purchase discretionary goods, while unanticipated price decreases enhance it.

This hypothesis is tested using data from a computerized grocery-shopping simulation in which subjects are faced with the problem of minimizing the cost of keeping a home stocked with twelve different grocery items over a multi-period horizon. After an acclimation period where subjects are allowed to develop expectations for the usual prices of these goods, they are exposed to two extreme price-shock events: one where a required item is priced dramatically above its regular retail price, and another dramatically below.

The data support the core spillover hypothesis, with high-price shocks suppressing average out-of-category buying and low-price shocks inflating it. The data also show, however, that the mechanism that induces these effects differs between positive and negative shocks. The primary driver of the suppression of average sales given unexpected price increases is dramatically increased small-deal sensitivity; subjects are loathe to buy goods sold at regular retail prices, but are more apt to buy goods offered for sale at small discounts. On the other hand, unexpected price decreases appear to induce a simpler illusory wealth effect, with buying increased but without any change in small-deal sensitivity.

An additional surprising finding is that the spillover effect proves robust to several variables that are hypothesized to limit its boundaries. Specifically, the strength of the spillover effect was not modified by variation in whether or not consumers had a standing inventory of a good at home (a surrogate for whether its purchase is more likely to be seen as discretionary), the base price to which the price shock is applied, and previous exposures to price shocks.

 

"PHANTOM GAINS AND LOSSES: THE EFFECTS OF PAPER INCOME CHANGES ON SPENDING AND CONSUMPTION DECISIONS"

Amar Cheema, Dilip Soman

The income effect documented in microeconomic theory describes the effect of changes in income on the marginal propensity to consume (MPC). Specifically, the prediction is that as a given consumer’s income increases (decreases), she will be more (less) likely to spend on non-discretionary expenses. Recent research shows, however, that MPC is sensitive not only to the actual income but also to the liquidity (Souleles and Gross, Quarterly Journal of Economics, in press). Further, the perception of liquidity (rather than actual quantity) ha been shown to influence MPC (Soman, Journal of Consumer Research, 2001).

Research has also shown that consumers form category specific budgets that constrain spending and consumption (Heath and Soll, Journal of Consumer Research, 1996). In the present research, we look at situations in which physical income and budget is held constant, but where the "real" or "paper" value of the income changes. One example of such a change is due to unexpected price increases or decreases of budgeted items. Another example of a paper change is due to changes in the accounted value of an asset (e.g. due to an increase or decrease on a stock price or real estate market). And in the context of managerial decision-making, a third example is the valuation of existing inventory (bought at an old price) We refer to these changes as "phantom" gains or losses, and study their effect on consumption and spending decisions.

We argue that consumers can strategically use these phantom income changes to justify any particular course of action. In a series of two experiments using hypothetical choices, we build upon mental accounting to show that a) similar to the income effect, a phantom income increase (decrease) results in an increased (decreased) likelihood of spending and consuming, b) the strength of the phantom income effect is moderated by consumer motivation and the need to justify the purchase and c) the phantom income effect is stronger where the phantom change is non-reversible (i.e. receiving an unexpected discount) as compared to when it is reversible (i.e. a change in stock price). However, even when the phantom change is reversible, consumers may strategically use it to justify consumption of tempting products. The experiments are conducted in several domainsBin-store shopping situations or decisions to spend on a vacationBand phantom gains and losses are manipulated by unexpected price changes as well as changes in the value of assets. Across these experiments, we find evidence for the fact that phantom gains or losses do have an impact on MPC, but that consumers can strategically regulate their mental accounting to justify their preferred course of action.

The present research joins the recent body of work (cf. Soman and Gourville, JMR 2001) suggesting that rather than being a rigid and categorical process, mental accounting may be a pliant, malleable and self-serving process. We conclude the presentation with theoretical implications of our research on the notions of mental accounts as self-control devices and on the concept of the "concreteness principle", and also discuss practical implications.

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