Buyer Market Price Knowledge Influence on Acceptable Price Range and Price Limits

ABSTRACT - This study examines the effect of consumer market price knowledge on their acceptable price limits and acceptable price range. The results indicate that price limits are strongly affected by the degree of market price knowledge possessed by the consumer. Subjects indicated a higher mean lower and upper price limit, and an narrower acceptable price range when they were market price knowledgeable than when they possessed little or no market price knowledge. Moreover, the addition of market price information reduced variability only in the upper price limit, but not the lower price limit. These findings suggest that consumer limits are shifted or shaped by the prices they are exposed to at points-of purchase or through their informational search activities.

Citation:

Rustan Kosenko and Don Rahtz (1988) ,"Buyer Market Price Knowledge Influence on Acceptable Price Range and Price Limits", in NA - Advances in Consumer Research Volume 15, eds. Micheal J. Houston, Provo, UT : Association for Consumer Research, Pages: 328-331.

Advances in Consumer Research Volume 15, 1988      Pages 328-331

BUYER MARKET PRICE KNOWLEDGE INFLUENCE ON ACCEPTABLE PRICE RANGE AND PRICE LIMITS

Rustan Kosenko, Ohio University

Don Rahtz, College of William and Mary

ABSTRACT -

This study examines the effect of consumer market price knowledge on their acceptable price limits and acceptable price range. The results indicate that price limits are strongly affected by the degree of market price knowledge possessed by the consumer. Subjects indicated a higher mean lower and upper price limit, and an narrower acceptable price range when they were market price knowledgeable than when they possessed little or no market price knowledge. Moreover, the addition of market price information reduced variability only in the upper price limit, but not the lower price limit. These findings suggest that consumer limits are shifted or shaped by the prices they are exposed to at points-of purchase or through their informational search activities.

INTRODUCTION

The idea that consumers possess a range of acceptable prices which is bounded by a lower and upper price limit (threshold) they are willing to pay for a contemplated product purchase has been analytically derived from Psychophysics (Monroe 1971) and theoretically derived from Social Judgment theory (Sherif 1963; Monore 1971; Monroe and Venkatsen 1969; Raju 1977) .

The lower price limit is defined as the lowest price (usually above 0) a consumer would be willing to pay for a product. The rationale for the lower limit is based on buyer suspicion of "too good of a deal" and the feeling that "you get what you pay for" (Stoetzel 1970; Adam 1958; Fouilhe 1970; Gabor and Granger 1966). The upper limit is defined as the highest price a buyer is willing to pay for a contemplated purchase. Consumers are considered as rationalizing that at a certain high price, quality is no longer differentiated and that no product can be worth more than this certain high price (Stoetzel 1970; Gabor and Granger 1966, 1970). Therefore, consumers should have a range of prices that they are willing to pay for a product bounded by a lower and upper price limit.

Despite the fact that price information is one informational source always available to a consumer (at least in terms of point-of-purchase information), this potentially influential factor remains relatively unexplored. Raju (1977) underscores the importance of acceptable price range research by claiming that a systematic investigation of acceptable price range is particularly important because price perceptions and evaluations within unacceptable and acceptable low and high ranges may have different effects on consumer purchase intentions.

Cox (1986) astutely contends that buyers may not bring rigidly formed price limits (acceptable price range) into a purchase situation, but that the acceptable price range is to some extent "shaped or shifted" by the prices that the consumer finds when s(he) becomes a potential buyer. This may have a pronounced effect on consumer willingness-to-buy at specific product price offerings.

The purpose of this paper is to test the hypothesis that consumer price limits and acceptable price range are determined to some extent by the degree of market price knowledge that the consumer possesses and that this factor may reduce variability in the price limits.

LITERATURE REVIEW AND HYPOTHESES

Theory

Perception is considered to be subject to thresholds of awareness. From psychophysics, researchers have found that there are absolute upper and lower boundaries to human perceptual and sensory capabilities (Corso 1963; Monroe 1973). From this perspective, absolute price thresholds (limits) and, concomitantly, acceptable price range are viewed as limits of responsiveness to extreme price stimuli in much the same way as sensory limits of responsiveness to extreme sensory stimuli (Monroe 1973). Translating this phenomenon into consumer interpretation of price, then a priori there should be upper and lower price thresholds (limits). That is, a product priced below or above these thresholds would be less likely to produce a willingness to buy response since certain prices will not be perceived. As a result, this leads to the hypothesis that consumers do not enter a purchase situation with one acceptable price they are willing to pay for a product, but with a range of acceptable prices (Monroe and Petroshius 1981).

The acceptable price range hypothesis can be derived from Social judgment theory. Latitudes of acceptance and rejection, and noncommitment are concepts central to assessing shift in individual judgments of stimuli ( Sherif and Hovland 1961; Sherif et al. 1965). In the context of pricing (judgments of price stimuli), latitude of acceptance would constitute an acceptable price range, latitude of rejection would translate as an unacceptable price range, and latitude of noncommitment would be a range of neither acceptable nor unacceptable prices. The key is that the regions are derived from a judgment process that combines an evaluation and comparison of all the objects (prices) in the stimulus set ( Sherif et al. 1965). By price judgment is meant the individual's assessment of whether a price is too low (unacceptable low), just right (acceptable), or too high (unacceptable high) in terms of willingness to buy at any given price. Governing the width of the latitudes is individual involvement in the stimulus.

Studies have shown that the greater the involvement in an object (e.g., a product purchase, price), the narrower the latitude of acceptance (Sherif et al. 1965; Sherif and Hovland 1961). In pricing terms then, the width of the acceptable price latitude or range should be governed by individual product involvement or product familiarity (e.g., purchase experience, brand knowledge, price knowledge, etc.) Therefore, individuals with higher product familiarity in terms of market price knowledge, etc. are likely to be more discriminating and would be expected to have narrower acceptable price ranges. This effect would be expected from Social judgment theory because greater product familiarity would mean greater involvement with the product, thereby causing a narrower acceptable price range.

The logical process would entail a price assessment or judgment in terms of purchase intention. The lower price limit implies "poor value" for the money and poor value implies "don't buy." The same logical inference can be made for the upper price limit. A high price implies "too expensive" and too expensive implies "poor value" for the money and poor value implies "don't buy." However, it would seem to be logical to assume that what is perceived as "poor value" and "too expensive" would vary by the degree of price knowledge (or other informational cues) exhibited by the buyer (Kosenko 1987).

The initial argument for the existence of price thresholds is based on psychophysics and its emphasis on perception to justify lower and upper price limits. However, price limits are defined in terms of attitude (purchase intention) which is not a perceptual variable. As a result, a direct translation to price perception is that, given a range of stimuli to be evaluated, some of those prices will not be perceived (Kosenko 1987).

Empirical Support

While the concept that buyers possess price thresholds (acceptable price range) has empirical support (Stoetzel 1970; Adam 1958; Fouilhe 1970; Gabor and Granger 1966, 1970; Sherif 1963; Monroe 1971; Monroe and Venkatesan 1969; Raju 1977; Downey 1973; Cox 1986), only Fouilhe (1970), Raju (1977), and Cox (1986) have attempted to investigate specific factors that affect price limits and/or acceptable price range.

Fouilhe (1970) examined the effect of brand knowledge on acceptable price range of two products detergent and packaged soup. He reported that the branded products had narrower acceptable price ranges than their unbranded counterparts. Unfortunately the author presented no statistical support for the findings. Using meta-analysis, Kosenko (1987) reported that only in absolute terms was the acceptable price range narrower for the branded packaged soup. However, branded laundry detergent had a wider acceptable price range than its unbranded counterpart. Nevertheless, branded products did have a greater impact on individual price thresholds than did the unbranded products. That is, the lower and upper price limits were greater for the branded products than their unbranded counterparts. Nonetheless, the study does suggest that brand name is one source of market information that may effect price limits and acceptable price range at least for some products. This finding is consistent with some of the price-quality literature that have found a price- quality interpretation in terms of brand name (Jacoby and Olson 1976, Monroe and Petroshius 1981).

Raju (1977) investigated the impact of product .involvement in terms of product familiarity on the acceptable price range using the same method. The acceptable price range was found to be narrower at p = .10 for those subjects that were familiar (more involved) with a stereo receiver (no brand name was provided), although no significant difference was reported for the two conditions for the lower and upper price limit.

While the two studies produce conflicting results, the major weakness of the methodologies employed was the lack of control of subject prior price knowledge such that the two groups may not have been statistically equivalent despite random assignment to the treatment groups. For example, Fouilhe (1970) concluded in his study that the price limits, and therefore the acceptable price range, may be based in part on past prices paid or the prevailing price knowledge of the consumer. Moreover, neither author specified if their subjects evaluated prices representative of the actual market prices. Therefore, price knowledge differences among their subjects may have confounded the results.

Cox (1986) addressed the methodological limitations mentioned above. He examined the hypothesis that buyers do not enter a purchase situation with "rigidly" formed price limits, but that those price limits are "shaped or formed" in part by the prices that a buyer encounters in the marketplace, and that price interpretation is predicated to some extent by the prices last paid for the product. He based his argument on his review of price awareness and human psychological literature. That literature suggests that subjects with little experience with the stimuli they are asked to evaluate may use the prevailing stimuli as a frame of reference for their evaluation. He found that price limits were related to prices last paid (or prior purchase experience), and that at least the lower price limit (but not the upper price limit) was shifted by the range of the prices presented to the consumer. This would suggest that consumers adjust at least the lower price limit by the prices to which they are exposed. Most importantly, Cox (1986) reported that the upper price limit shift may have been masked by the large degree of variability in the upper price limit relative to the variability in the lower price limit. This finding confirmed the large variability in the upper limit reported by Fouilhe (1970) and Raju (1977) and leads to identifying some factors that explain some of the variability in price limit measurement. Moreover, this finding indicates that prior price knowledge differences between subject groups may have confounded the results of the Fouilhe (1970) and Raju (1977) research.

In summary, there is some research evidence to suggest that market price knowledge may unravel the conflicting empirical results. Consumer market price knowledge seems to be a logical factor that should influence price threshold measurement.

Hypotheses

Based on the theoretical framework and the literature review, the hypotheses guiding this research are

Hypothesis 1: There is an inverse relationship between market price knowledge and the width of the acceptable price range. Subjects with market price knowledge will possess a narrower mean acceptable price range than subjects with little or no market price knowledge.

The rationale for this hypothesis has been discussed above, and is expected from Social Judgment theory. Consumers possessing market price knowledge would be more discriminating, would evaluate fewer prices as acceptable to pay for a product, and therefore would possess a narrower acceptable price range.

Hypothesis 2a: There is a positive relationship between market price knowledge and the lower price limit. Subjects possessing market price knowledge will have a higher mean lower price limit than subjects possessing little or no market price knowledge.

Hypothesis 2b: Variability in the lower price limit is inversely related to market price knowledge. Variability in the lower price limit will be lower for subjects with market price knowledge than those subjects with little or no market price knowledge.

Hypotheses 3a: There is a positive relationship between market price knowledge and the upper price limit. Subjects possessing market price knowledge will have a higher mean upper price limit than subjects possessing little or no market price knowledge.

Hypothesis 3b: Variability in the upper price limit is inversely related to market price knowledge. Variability in the upper price limit will be lower for subjects with market price knowledge than those subjects with little or no market price knowledge.

These hypotheses are exploratory in nature and are somewhat consistent with the results reported by Fouilhe (1970), Raju (1977), and Cox (1986). Reduction in the variability in the price limits is predicated on Social judgment theory where the more involved (more knowledgeable) the buyer, the more discriminating the buyer will become in terms of evaluating the prices presented to him/her. Buyers will adjust their evaluation of the prices presented to them relative to the actual prices in the marketplace. This view is indirectly supported through price- awareness research. That research has indicated that buyers typically have a poor memory of the prices they previously paid for products that are frequently purchased (see e.g. Dickson and Sawyer 1986; and Monroe, Powell and Choudhury 1986). Logically then, consumer acceptable price limits for an infrequently purchased product should be affected by their level of market price knowledge.

THE EXPERIMENT

Sample

Sixty-six subjects were selected from two undergraduate business courses at a major Canadian university and were randomly assigned to two treatment groups.

Product

The product selected for the experiment was based on the criteria that there would be variation in market price knowledge among the subjects, and that the product is purchased by college students of both sexes. The product used in this experiment was a personal computer. Interviews with all local computer retailers confirmed that college students were a major purchasing segment.

Dependent Variables

The dependent variables --- acceptable price range, lower price limit, and upper price range--- were measured using the Stoetzel method (1970). Subjects were provided with a detailed description of a desktop personal computer that was presented to them, and a random list of 50 prices ranging from $1500 to $6400. The prices differed by a constant interval of $100. The prices limits and acceptable price range were determined by subject responses to two questions:

(1) What is the minimum price that you would be willing to pay for the personal computer (that is, below what price would you seriously doubt the quality of the product?)

(2) What is the maximum price that you would be willing to pay for the personal computer (that is, beyond what price would you feel it would not be worth paying more?)

Question 1 produced the lower price limit, question 2 indicated the upper price limit, and the difference between the lower and upper price limit established the acceptable price range for each of the subjects.

While the Stoetzel (1970) method is a simple and straight-forward method, the questions of the method nave been criticized as being leading questions (Stoetzel 1970; Monroe 1971; Gabor and Granger 1966; Jacoby sad Olson 1976). However, Kosenko (1987) investigated whether the "leading" question criticism really mattered in the measurement of price limits. He demonstrated that the Stoetzel (1954) method was a valid method for assessing price limits.

Procedure

Subjects were provided a response booklet consisting of: (1) an instruction sheet, (2) a page containing a product description, a series of 50 prices ranging from $1500 to $6400 in $100 intervals appearing in random order, and the two Stoetzel questions concerning the lowest and highest price they would consider paying for the product, and (3) a page of questions assessing subject familiarity with personal computers, computer prices, and some demographic questions.

Market price knowledge was operationalized by providing subjects assigned to the market price knowledgeable group with the product description and a "Table" that indicated the actual retail prices that the personal computer was selling for in the local market area along with the product description. The Table contained 27 prices ranging from $2900 to $4100. There were 10 different prices. Those subjects were also provided a series of questions to determine whether subjects attended to the manipulation. Those questions were: (1) what is the lowest price for the computer in the local market?, (2) what is the highest price in the local market?, (3) how many different prices are there for the computer in the local market?, and (4) what is the average price in the local market? After subjects answered these questions, the subjects were provided with the same 50 prices and the two Stotezel questions presented to the control group.

During the experiment, the subjects showed little concern in the experimental materials of their colleagues, and there was no evidence to suggest that subjects were aware of the different sets of experimental material provided. To determine the presence of demand artifacts, one question was asked to assess subject knowledge of the experiment. Based on the responses, no subjects quessed the true nature of the experiment.

RESULTS

The hypotheses were investigated using a series of independent sample t-tests, and through analysis of covariance for each of the dependent variables. The dependent variables were the acceptable price range, lower price limit, and upper price limit. Market price knowledge was the experimental variable manipulated in this study. The market price knowledge variable had two treatment levels: (1) in the market price knowledge treatment, subjects were given a table which provided subjects with the actual prices that the product was currently selling for in the local marketplace, (2) in the no or little market price knowledge treatment, subjects received no market price information other than that present in memory. Subject prior price knowledge could not be ascertained in this study, since it was felt that the procedure would sensitize the subjects. Therefore, prior price knowledge differences among-the subjects were assessed expost- facto. Therefore, the experimental hypotheses were reexamined through analysis of covariance with "prior product price knowledge" entered as a dichotomous factor. The basic and covariate results are reported in Tables 1 and 2.

Prior to the statistical analysis, exploratory data analysis was conducted on the data. The results indicated that two data points were outliers (p <.01). That data were eliminated from the subsequent analysis.

TABLE 1

ACCEPTABLE PRICE RANGE, LOWER PRICE LIMIT, AND UPPER PRICE LIMIT MEANS

TABLE 2

MEANS FOR BUYERS REPORTED ACCEPTABLE PRICE RANGE AND PRICE LIMITS ADJUSTED FOR THE PRIOR PRICE KNOWLEDGE COVARIATE

Hypothesis 1 was only weakly supported (p = .093). Subjects in the market price information treatment specified a narrower acceptable price range (x = $1335.50) than did the subjects in the no market price information treatment (x = $1660.06). This finding supports both Fouilhe (1970) and Raju (1910). However, neither of the authors controlled for subject market price knowledge.

As a result, the data were reexamined through an analysis of covariance using the prior price knowledge as a covariate. The hypothesis was supported by the analysis. The prior market price knowledge covariate was insignificant (p=.410), but the price information main effect (p=.083) was found to be significant.

Hypothesis 2a was confirmed (p= .000). There was a dramatic difference in the lower price limit between the two treatment groups. The lower price limit was greater (x = $2709.01) for price knowledgeable subjects than subjects with little or no price knowledge (x = $1966.70). This finding is consistent with the findings of Cox (1986) and Fouilhe (1970) but contradicts the finding reported by Raju (1911). This finding suggests that subjects may use the range of prices found in the purchase situation as a frame of reference for evaluating Price stimuli.

Prior price knowledge could confound the results, but controlling for that factor reconfirmed the initial hypothesis. The covariate was found to be insignificant at the .287 level and the price information main effect was significant at .000.

Hypothesis 2b was not supported (p = .002) as hypothesized. Market price information did not decrease variability in the lower price limit. There was greater variability in the lower price limit (s.d = $639.00) in the market knowledgeable condition than in the no/limited market price knowledgeable condition (s.d. = 5361.10). Moreover, variability in the lower limit increased with the introduction of market price information rather than decreased.

Hypothesis 3a was supported (p = .027). The upper price limit was significantly greater for subjects with market price knowledge than subjects with limited price knowledge and confirms Hypothesis 3a. Price knowledgeable subjects had a mean upper price limit of $4084.80 while non-price knowledgeable subjects reported an upper price limit of $3627.30. Again, the results support the findings reported by Fouilhe (1970) but contradict Raju (1977) and Cox (1986). Nonetheless, it- indicates that buyer perception and evaluation of a product category with high prices relative to prices within that product category price is predicated on the prospective buyer's market price knowledge. Buyers may adjust their upper price limit to reflect the true prices in the market place.

The analysis of covariance results reconfirmed the initial results. The prior market price knowledge covariate was found to be insignificant at the .251 level while the price information main effect was significant at .026.

Hypothesis 3b was confirmed. Market price knowledge reduced the variability in the upper price limit. There was less variability in the highest price subjects were willing to pay for the product (s.d.= $644.70) for price knowledgeable subjects than those with little or no knowledge (s.d. = $ 837.80). This finding was significant at the .025. It would seem that market price knowledge does reduce variability in the upper price limit, but not in the lower price limit.

In sum, market price knowledge did influence the lower and upper price limits, and the acceptable price range as hypothesized. However, the hypothesized reduction in the variability in the price limits was supported only in the upper price limit.

CONCLUSION

Understanding buyer acceptable price thresholds is important not only for those who set prices for their products,but for those who investigate purchase behavior where price is manipulated. This paper has attempted to bring additional insight into how market price information may impact on price limit measurement. The experimental results suggest that consumer market price knowledge should be a concern in future price threshold research.

The role of this particular variable in pricing research is important in that price is one of a number of variables always available to the consumer at the point-of-purchase. As a result, researchers attempting to establish market-wide frequency distributions should use prices reflecting actual market prices since this research and that of Cox (1986) indicate that price evaluation and interpretation is influenced by the range of price presented to the subjects. If the range of prices subjects are asked to evaluate affect their price limits, then researchers who have measured price limits may have altered that which they set out to do by having subjects evaluate a range of prices selected by the researcher irrespective of their realism (e.g. Monroe 1971, Sherif 1963, Ragu 1977, Fouilhe 1970, Stoetzel 1970).

Cox (1986) presents a practical implication of this result. A marketing manager can adjust the price range of a particular product assortment, shift consumer price limits, and influence consumer price evaluation. For example, a retailer can add a more expensive computer or just increase the price of the highest price computer to make another relatively expensive computer seem less expensive. However, this effect needs to be more rigorously examined under various experimental conditions.

Future research should examine this effect across various subject populations and product categories under product present/absent conditions using the various price threshold measurement methods. Possibly increasing realism in the purchasing task could be improved by providing subjects with an opportunity to make actual purchase decisions. Moreover, while the lower limit may have a. quality interpretation, the upper limit has a quality interpretation within the context of an economic constraint. Consumers have only so much to pay for a contemplated purchase. Possibly manipulating consumer financial positions may lead to a better understanding of how price thresholds are formed and how they are shifted.

While this study examined the effect of market price knowledge on price limits, there are a number of other factors or information always available to consumers at point-of-purchase that may influence price thresholds. Brand name, store image are two such factors. Also, there may be demographic (e.g. sex, age, income) and behavioral (e.g. prior purchase experience) factors that are directly related to price limit measurement. These factors should be systematically studied.

In summary, this research is not conclusive and helps to generate questions that may lead to more substantive price threshold research. Moreover, a systematic investigation into the factors that may influence price limits must precede any development of a general price threshold theory. To that end, this author is engaged in such research.

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