Dual effect-based market segmentation and price optimization

Abstract

Price has two distinct effects on consumers' evaluations of products, namely sacrifice and informational effects. No pricing models exist that explicitly account for this dual effect of price. This article combines insights from behavioral research on the dual effect of price with a model of market segmentation and price discrimination among segments. The authors propose a method for market segmentation that is based on the degree to which consumers attend to the informational and sacrifice effects of price and combine the segment-level parameter estimates with a model of price optimization. An empirical study using seven different product categories provides evidence in support of the robustness and relevance of the proposed approach. The results show that the dual effect-based approach captures consumers' price preference structures more precisely than a segmentation on the basis of the commonly measured total effect of price and thereby enables sellers to increase their profits.