Anchoring and Adjustment in Non-Linear Pricing

ABSTRACT - Marketers frequently price services in a non-linear fashion such that the cost for each additional unit depends on total usage. This forces consumers to calculate a weighted average to determine their effective price per unit. Our research indicates that consumers exhibit predictable biases in price estimation and revealed preferences for different pricing plans. Consumers rely on two anchors when evaluating non-linear pricing plans. First, consumers frequently overly anchor on the rate associated with the last volume tier a consumer expects to reach. This causes consumers to underestimate the effective price for plans where the marginal rate decreases with usage (direction bias). Second, consumers overly anchor their estimates on the simple average of the rates across the different usage tiers. This produces an underestimation of the effective price for plans with a larger percentage of the volume at higher rates (simple average bias).



Citation:

Stephen J. Hoch (2005) ,"Anchoring and Adjustment in Non-Linear Pricing", in AP - Asia Pacific Advances in Consumer Research Volume 6, eds. Yong-Uon Ha and Youjae Yi, Duluth, MN : Association for Consumer Research, Pages: 2.

Asia Pacific Advances in Consumer Research Volume 6, 2005      Page 2

ANCHORING AND ADJUSTMENT IN NON-LINEAR PRICING

Stephen J. Hoch, University of Pennsylvania, U.S.A.

ABSTRACT -

Marketers frequently price services in a non-linear fashion such that the cost for each additional unit depends on total usage. This forces consumers to calculate a weighted average to determine their effective price per unit. Our research indicates that consumers exhibit predictable biases in price estimation and revealed preferences for different pricing plans. Consumers rely on two anchors when evaluating non-linear pricing plans. First, consumers frequently overly anchor on the rate associated with the last volume tier a consumer expects to reach. This causes consumers to underestimate the effective price for plans where the marginal rate decreases with usage (direction bias). Second, consumers overly anchor their estimates on the simple average of the rates across the different usage tiers. This produces an underestimation of the effective price for plans with a larger percentage of the volume at higher rates (simple average bias).

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Authors

Stephen J. Hoch, University of Pennsylvania, U.S.A.



Volume

AP - Asia Pacific Advances in Consumer Research Volume 6 | 2005



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