Reference Effects in Dynamic Marketing Mix Environments: Insights From Decision-Making Research

Citation:

Deborah J. Mitchell and Sankar Sen (1995) ,"Reference Effects in Dynamic Marketing Mix Environments: Insights From Decision-Making Research", in NA - Advances in Consumer Research Volume 22, eds. Frank R. Kardes and Mita Sujan, Provo, UT : Association for Consumer Research, Pages: 62.

Advances in Consumer Research Volume 22, 1995      Page 62

REFERENCE EFFECTS IN DYNAMIC MARKETING MIX ENVIRONMENTS: INSIGHTS FROM DECISION-MAKING RESEARCH

Deborah J. Mitchell, Temple University

Sankar Sen, Temple University

As human beings, our judgments are based in subjectivity. Perception being only a bet on reality, seemingly inconsequential aspects of the environment have the power, at times, to drive cognition and affect in ways not expected, and perhaps not desired, by the individuals involved. Thus, whether or not we are happy and satisfied with ourselves (or others) depends on the current standard or reference point to which those lives are compared (Festinger 1954; Strack, Schwarz, and Gschneidinger 1985); mood and self-esteem can swing dramatically with a change in reference point. Research on wishful thinking has shown that when making judgments of likelihood, whether or not probabilities and outcomes are treated as independent varies with the valence and size of the outcome considered (Slovic 1974). Finally, whether or not we engage in certain behaviors, from voting to condom use, can vary depending on whether we frame events as potential losses or potential gains (Thaler 1993).

The pervasiveness of such effects has been demonstrated in the domain of consumer choice, as well. For example, product attribute descriptions, framed in a normatively equivalent manner, can change product preferences. Levin and Gaeth (1987) showed that consumers' preference for beef is greater when it is described as 75% lean than as 25% fat. In addition, how brands or alternatives are grouped and considered can set up different contexts which in turn will influence choice. For example, the composition of a consideration set can influence decision outcomes via attraction and compromise effects (Huber, Payne, and Puto 1982; Simonson and Tversky 1992). Relatedly, the order in which alternatives are considered can set implicit reference brands for the evaluation of subsequent alternatives, ultimately changing decision outcomes (Hauser 1986; Kahn, Moore, and Glazer 1992).

Given the vast number of demonstrations of context (or more specifically, reference) effects within psychology and consumer behavior, it is clear that context influences decision-making. In addition, it is clear that at times variations in context can lead to outcomes which appear to be non-normative. However, several important questions remain. First, what psychological processes underly these dramatic shifts? In addition, do such effects hold in dynamic, as well as static, environments?

Second, the great majority of research on context and reference effects has been done in strictly-controlled laboratory environments, using static decision tasks with alternatives described in a limited manner on very few attributes. Do findings based on such an approach generalize easily to more naturalistic settings?

Third, most research on reference dependence within marketing has looked at price as the key contextual cue. However, are evaluations of non-price attributes reference dependent as well? More generally, relatively little work has addressed the implications of such phenomena for managers. How should managers apply research findings on reference dependence? Clearly there are implications for the pricing strategist. But if these phenomena are as powerful and pervasive as the data suggest, there will be product strategy implications as well. Of course, providing managers with prescriptions for marketing mix applications may not be helpful if they themselves fall prey to context effects and biases in their strategic mix decisions.

This special topic seminar addressed these key theoretical and application questions related to demonstrations of reference effects in decision-making. Specifically, it brought together researchers from varied empirical and methodological backgrounds, working on primary, different but related, dimensions of reference dependence and marketing mix appplications. Collectively these studies (1) demonstrated new phenomena within the domain of context effects, and (2) linked basic research that has already been done with the theoretical contributions and marketing mix applications inherent in these papers.

In terms of session structure, the first three papers presented new findings from consumer decision-making research. The first paper, by Morwitz and Sen, was concerned with how consumers interpret changes in product strategy, and how these perceptions influence product preferences. Integrating work on intertemporal decision-making and reference dependence, the first experiment demonstrated loss aversion on several non-price attributes over time. In the second experiment, the processes underlying this effect were investigated further.

Next, O'Curry and Sheu examined the basic question of how internal reference prices are formed, particularly within product categories where there is heavy price promotion. The Strahilevitz paper examined how our experiences and expectations regarding different modes of acquiring consumer goods affects our preferences for them. The final portion of the session addressed one of our primary objectives, i.e., to examine how, or to what extent, managers can use these findings in making strategic marketing mix decisions. The Mitchell and Bhoovaraghava paper provided a demonstration of a heretofore unexamined context effect ('point of view'), using managers' product strategy decisions as input. In addition, a second study investigated the cognitive processes underlying this effect.

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