Special Session Summary the Role of Reference Points in Evaluating Price Information

Citation:

Alexander Chernev and S. Christian Wheeler (2003) ,"Special Session Summary the Role of Reference Points in Evaluating Price Information", in NA - Advances in Consumer Research Volume 30, eds. Punam Anand Keller and Dennis W. Rook, Valdosta, GA : Association for Consumer Research, Pages: 305-308.

Advances in Consumer Research Volume 30, 2003     Pages 305-308

SPECIAL SESSION SUMMARY

THE ROLE OF REFERENCE POINTS IN EVALUATING PRICE INFORMATION

Alexander Chernev, Northwestern University

S. Christian Wheeler, Stanford University

The importance of reference points in price perception and evaluation has been underscored by numerous researchers (e.g., Alba et al. 1994; Heath et al. 1995; Herr 1989; Lichtenstein et al. 1988; Mayhew and Winer 1992; Urbany and Dickson 1991). The influence of reference points on consumer price evaluation was examined from multiple theoretical perspectives: (1) How do consumers evaluate prices across different retailers when multiple reference points are available? Do motivational factors directionally bias evaluations of pricing outcomes? (2) How do consumers integrate their social knowledge with reference points to form purchase outcome evaluations? Are the effects of reference prices and script-based inferences additive or multiplicative? (3) Do consumers prefer to generate (name) or to select a price in a reverse auction? How does availability of reference points affect consumer preference for these price elicitation strategies?

The first presentation by Meyvis and Cooke examined how consumers evaluate and learn from prices when pricing information is inconsistent across retailers. For example, how will people evaluate a store’s price for a product when the same product is cheaper at a second store, but more expensive at a third store? The effects, the authors discovered, are driven by consumers’ motivations. Across five studies, the authors found that consumers who are motivated to learn and improve their choices tend to focus on the unfavorable comparisons, resulting in an often unwarranted belief that the chosen store is more expensive than the other stores.

The second presentation by Wheeler discussed how social inferences combine with externally presented reference prices to determine how consumers evaluate purchase outcomes. In a series of three studies, he showed that script violations can change how people evaluate the negotiated price paid for an object, even when the objective outcome itself is constant. This effect is robust even in the face of salient and unambiguous external reference prices indicating the actual value of the object and is not mediated by value perceptions. This suggests that script-based inferences can exert a strong and relatively direct influence on price outcome evaluations.

The third presentation by Chernev compared two reverse auction price-elicitation strategies: price generation (i.e., "name your price") and price selection (i.e., "select your price"). Contrary to the common assumption that naming a price will be preferred by consumers because it offers the most precision in articulating one’s willingness to pay, this research demonstrates that consumers often prefer to select rather than to generate a price. In a series of three experiments, the author showed that the potential unfavorable effects of the price generation task are associated with the absence of a readily available reference price range. He further demonstrated that internally generated pre-choice reference prices can also eliminate the potential negative effect of the price generation task and strengthen consumer preferences. These findings support the author’s proposition that a pre-choice articulation of reference points can simplify consumer decision making by imposing a structure consistent with the nature of the decision task.

At the end of the session, Dipankar Chakravarti led the discussion and engaged the audience participants in a dialogue exploring the multiple means by which reference points influence consumer evaluations of pricing information and their implications for consumer choice.

 

LEARNING FROM MIXED FEEDBACK: THE BIASED PROCESSING OF STORE PRICE COMPARISONS

Tom Meyvis, New York University

Alan Cooke, University of Florida

Consumers interpret price information by comparing it to salient reference points (Mayhew and Winer 1992; Niedrich, Sharma, and Wedell 2001). For instance, consumers can learn about a store’s pricing policy by comparing the price charged at this store to the prices they would have paid had they gone to other stores. Often, this feedback will be mixed: the same product may be cheaper at a second store, but more expensive at a third store. The goal of our project is to examine how consumers learn from such mixed feedback. Do consumers assign equal weights to both types of comparisons or do they process the reference points in a selective fashion?

A first possibility is that consumers will set out to test the hypothesis that their chosen store is the cheapest store - and that they will test this hypothesis in a confirmatory manner (Hoch and Ha 1986). Consumers may focus more on those reference points that confirm that they made the correct choice (i.e., the favorable comparisons), either because of affective concerns or because of attention biases. Thus, this perspective suggests that consumers will selectively attend to the favorable reference points and will perceive the chosen store as cheaper than the other stores.

A second possibility is that consumers will focus more on those reference points that can help them improve their choices. Research on social comparisons and counterfactual comparisons has indicated that unfavorable comparisons can help decision makers prepare for the future. Similarly, consumers in a store choice context may selectively attend to lower prices charged at other stores because these comparisons reveal opportunities for future improvement. Thus, this perspective suggests that consumers will selectively attend to the unfavorable reference points and will perceive the chosen store as more expensive than the other stores.

In a first experiment subjects were presented with three stores and with preliminary price information that was either consistent or inconsistent with their priors. Subjects then either freely selected a store, or the computer selected a store for them. They then made 36 shopping trips to the selected store, on each of which they were shown the price at the chosen store, as well as the prices they would have paid for the same product at the other two stores. These price comparisons provided mixed feedback: sometimes the chosen store was cheaper, sometimes it charged the same price, and sometimes it was more expensive. Overall, the three stores had completely equivalent price distributions. Finally, subjects indicated which store they perceived as the cheapest store across the shopping trips.

In three out of four conditions, subjects showed a strong hypothesis confirmation bias. When subjects had received consistent preliminary price information or when subjects did not have control over their store choice, the great majority of subjects indicated that, overall, the chosen store was cheaper than the other two stores. However, when consumers had made a free choice based on inconsistent information, the majority of subjects selected an alternative store as the cheapest store. These results suggest that only when consumers feel the need to improve their decisions and believe that they have the means to improve their decisions, they will focus on unfavorable rather than favorable comparisons. However, these results can also be accounted for by a regret-based explanation. The regret that is often associated with unfavorable comparisons could make these comparisons more salient and increase their relative impact. Furthermore, consumers may not feel regret when they had good reasons for their choice nor when they did not have control over their choice (Gilovich and Medvec 1995), which would explain why the focus on unfavorable comparisons only occurred in the inconsistent information/free choice condition.

The second experiment directly manipulated consumers’ motivation to learn to improve their choices and also tested whether the experience of regret was a necessary mediator of the increased impact of unfavorable comparisons. There were three conditions. In the experiential condition, subjects were simply asked to select a store and experience the 36 shopping trips to that store. The learning condition was similar to the experiential condition, with the exception that subjects expected having to make a second store choice and expected to be paid based on their performance on both sets of trips. Finally, in the practice condition, subjects also expected a second choice, but only expected to be paid based on the second set of trips. Thus, subjects in both learning and practice conditions should have been motivated to learn how to improve their choices, but only subjects in the learning condition should have experienced regret following unfavorable comparisons. The results show that subjects in both the learning and practice conditions perceived the chosen store as more expensive than did subjects in the experiential condition, consistent with the learning motivation account, but not with the regret-based account.

The third and fourth experiments confirm that the increased impact of unfavorable comparisons results from a selective attention effect rather than from a selective retrieval effect. Finally, in the fifth experiment, we show that the effect of learning motivation on the impact of unfavorable comparisons depends on consumers’ beliefs about the stores’ pricing policies. The previous effects are replicated when consumers believe that one of the stores is cheaper than the other two stores, but disappears when consumers believe that one of the stores is more expensive than the other two stores. It is argued that learning motivation can also increase the impact of favorable comparisons when consumers are trying to avoid a particularly bad alternative rather than just trying to improve on their current situation.

Together, the results indicate that when consumers are trying to learn from their previous choices (e.g., because the expect similar choices in the future) they will focus more on unfavorable reference points than favorable reference points, resulting in an unwarranted belief that the chosen store is more expensive than the other stores.

 

SCRIPTS AND REFERENCE POINTS AS DETERMINANTS OF TRANSACTION OUTCOME EVALUATIONS

S. Christian Wheeler, Stanford University

Research on reference prices suggests that individuals evaluate prices by comparing them to a salient standard. In some cases, the standard is externally provided (e.g., by indicating a "regular" and "sale" price), and in other cases, the standard is internally provided (e.g., by recalling past purchase prices; Kalyanaram and Winer 1995). Prices lower than one’s reference price are typically evaluated more favorably than prices above one’s reference price. These reference points sometimes exert greater influence on evaluations than does the absolute price itself.

Reference prices are not the only means of evaluating prices, however. Individuals bring a wealth of abstracted and generalized social knowledge structures to the marketplace. These generalized knowledge structures are referred to as schemata or scripts (Schanck and Abelson 1997). For example, people have event scripts concerning how different consumer transactions and consumption experiences typically occur (e.g., Smith and Houston 1985). Individuals also have negotiation scripts (Thompson 1990), and research shows that even novices exhibit high levels of agreement about the content and order of events typifying negotiation processes (O’Connor and Adams 1999).

Scripts could influence how individuals interpret transaction outcomes. For example, if the seller in a bargaining situation fails to counter the buyer’s initial offer with a counteroffer (as scripts would suggest should occur), the buyer could conclude that she made an inappropriate opening bid. Had the same final price been reached by means of a lengthy negotiation, the buyer might conclude that she received the product for a very good price. Hence, the script and script-based inferences, but not the outcome itself, would be what shapes the buyer’s evaluation of the outcome in this situation (see Thompson 1990). Schema-based inferences could potentially influence how people evaluate transactions even when salient contradictory reference points are available.

The three experiments in this paper tested the effect of consumer negotiation scripts on purchase evaluations. Participants read scenarios in which they were to imagine themselves purchasing an antique coffee table. In the scenario, they make an offer for $75 below the listed price, and in all outcomes, their offer is eventually accepted. For some participants, the offer is accepted quickly without any haggling or negotiation. For other participants, the offer is reluctantly accepted after much negotiation. Obtaining an object for less than the marked price and for one’s desired purchase price should presumably lead to positive evaluations of the outcome. However, despite equivalent, positive outcomes and favorable external reference prices across the two conditions described above, the participants’ evaluations of the outcome were predicted to be lower in the former scenario because it violates the script such that it implies that the buyer paid too much for the object.

A pretest established that participants had expectations in this scenario that a bargaining opponent would not accept their initial offer without further negotiation. Experiment 1 tested the influence of these expectations on transaction evaluations. Participants read one of the two scenarios described above and indicated their evaluations. Participants in the "reluctant acceptance" condition rated the outcome more positively than participants in the "quick acceptance" condition, despite the fact that the outcomes across the two scenarios were equivalent.

Experiment 2 confirmed that the outcome was due, not to the script violatio, but instead, to its implications for the buyer. If there is an external reason for the quick acceptance of the vendor, the script violation should not carry negative connotations and should not negatively affect evaluations. Experiment 2 replicated the two conditions in experiment 1 (i.e., quick acceptance or slow acceptance) and added a third condition in which the initial offer was accepted quickly because the store was about to close. It was hypothesized that this explanation for the quick acceptance would eliminate the effect of the script violation. Results supported the hypothesis. Participants in the "quick acceptance with no reason provided" condition reported lower outcome evaluations than participants in both the "reluctant acceptance" and the "quick acceptance with reason provided" conditions, which did not significantly differ from each other.

In experiments 1 and 2, there was ambiguity regarding the actual value of the table. It is possible that schema-based inferences would influence evaluations only in situations characterized by uncertainty. In experiment 3, the impact of script violations was tested when accurate and unambiguous reference points for evaluating the purchase were provided. Participants in experiment 3 read the scenarios described in experiment 1. Crossed orthogonally with the script violation manipulation was the presence of an alternate external reference point. Half of the participants read that an antique book indicated that the actual value of the coffee table was $100 over the marked price, whereas the other half of the participants did not receive this information. Availability of this salient reference price should eliminate any ambiguity about the actual value of the table. After reading the scenario, participants reported their outcome evaluations and their perceptions of the actual value of the table.

Replicating experiments 1 and 2, participants reported higher outcome evaluations when the dealer reluctantly, rather than quickly, accepted the offer. Additionally, participants reported higher outcome evaluations when they knew, versus didn=t know, that the object was worth more than both the marked price and the final sale price. However, value knowledge did not moderate the effect of acceptance speed on outcome evaluations.

Participants’ value perceptions followed a similar pattern. Estimates of the table’s value were higher when the dealer reluctantly, rather than quickly, accepted the offer. Similarly, estimates of the table’s value were higher when participants had, versus did not have, knowledge of the object’s value. Paralleling the analyses on outcome evaluations, the interaction between acceptance speed and value knowledge did not approach significance. Hence, acceptance speed did not moderate the impact of value knowledge on value perceptions.

When price perceptions were covaried from outcome evaluations, the value knowledge manipulation was no longer significant. The acceptance speed (script violation) effect, on the other hand, remained highly significant. Hence, the script violation appeared to directly override the salient external reference prices.

 

PRICE ELICITATION STRATEGIES IN CONSUMER CHOICE

Alexander Chernev, Northwestern University

This research examines how consumers set prices in the context of reverse auctions (e.g. Priceline). Specifically, I compare two elicitation strategies: price generation (i.e., "name your price") and price selection (i.e., "select your price"). In price generation, consumers are simply asked to state the price they are willing to pay for the product under consideration. In price selection, consumers are presented with a set of possible prices and asked to select the price they find most acceptable.

The price generation scenario is clearly more flexible than the selection scenario because it allows consumers to precisely articulate their willingness to pay. Indeed, in the generation scenario consumers have virtually unlimited degrees of freedom to state their price, whereas in the selection scenario they are restricted by the set of prices presented to them. Viewed from an economics standpoint, this flexibility is one of the reasons why the "name your price" strategy would be considered superior to the selection strategy, assuming that consumers have established preferences that can easily be translated into monetary terms.

Yet, because price generation assumes established preferences and predetermined willingness to pay, it can be argued that its impact on the consumer decision process will depend on the degree to which consumers are able to articulate their product utility in monetary terms. Building on this notion, I propose that in the absence of a readily available reference point (e.g., reference price range), the generation strategy is likely to be associated with a greater degree of uncertainty and cognitive effort and, as a result, will be perceived inferior to the simpler price selection task. It is further proposed that this effect is moderated by the presence of readily available reference prices. These propositions are examined in a series of three studies.

Experiments 1 and 2 examine how the nature of the price elicitation task (generate vs. select) is moderated by the availability of a reference price. Respondents were presented with a hypothetical scenario in which they were asked to purchase airline tickets from two online agencies. Both agencies employed reverse pricing but used different price-elicitation strategies: one agency asked consumers to generate (name) a price, while the other asked consumers to select from a list of ten available prices. Participants were randomly assigned to the conditions of a 2 (price-elicitation task: generation vs. selection) X 2 (reference price: available vs. not available) mixed factorial design. They were asked to indicate the price they were willing to pay and were told that if their bids were not successful they would have the option to purchase the ticket at the regular price (provided to all respondents). Participants were asked to indicate their confidence in the decision as well as their expectations of the likelihood of success of their bid.

The data show that individuals felt more confident in the outcomes of a selection task than a generation task. This effect was also significant, although less pronounced, in the presence of a readily available reference price. Furthermore, individuals perceived the selection task to have a higher likelihood of success compared to the generation task, an effect more pronounced when a reference price was not readily available. Participants’ evaluations of the likelihood of success of their bid followed a similar pattern: respondents expected prices derived from the selection task to have a higher probability of being accepted compared to prices elicited through the generation task. They also predicted a higher success probability in conditions where a reference price was present compared to conditions where a reference price was not readily available.

Building on the data from the first two studies, experiment 3 shows that the reference price range does not have to be externally provided to impact consumer preferences for a selection vs. generation pricing strategy. Internally generated reference prices can as well strengthen consumer preferences for the price generation strategy. In this study, participants were asked to state their expected price range before articulating their willingness to pay. This manipulation allows respondents to have reference prices readily available for use as benchmarks in the price-elicitation process. The data show that internally generated reference prices had a significant effect on consumer preferences for a selection vs. generation task and that the direction of this effect was consistent with the effects reported in experiments 1 and 2.

More generally, this research demonstrates that price elicitation is moderated by the presence of a readily available reference price. Furthermore, this reference price can be either externally provided or internally generated, which points to a more general construct underlying the differential impact of the selection and generation tasks.

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