Effects of Internal Reference Prices and Marketers’ Ability to Influence Which Reference Price Buyers Use

Abstract

Using variations in past prices and product category desirability, we examine the antecedents and uses of three commonly discussed internal reference prices: Expected, Fair and Reservation price. Differences in the antecedents are predicted to determine the relationships among the reference prices. The fair and expected reference prices are market-level focused reference prices; they can be evaluated based on market- level information without reference to ones own utility or preferences. Conversely, the reservation price is focused at the individual level; based on personal utility as well as market information. This level of focus (either market or individual level) is predicted to determine their usage on outcome measures. As hypothesised, we find past prices systematically affect all reference prices; higher (lower) past prices lead to higher (lower) reference prices. As predicted by the level of focus, personal category desirability does not affect the market-level focused fair and expected reference prices but category desirability does have a dramatic affect on the individually-focused reservation price. The perception of the expensiveness of a given price is a market-level evaluation; it can be judged for the marketplace independently of individual preferences and hence should be assessed using a market-level reference price. We find that for both desirable and less desirable product categories the market-focused fair reference price determines perceived expensiveness. Conversely, demand is an individually-focused evaluation and so should be determined by an individually-focused reference price. We find for both desirable and less desirable categories the individuallyfocused reservation price determines the demand. An additional study which overtly cued respondents to a specific reference price, either the fair price or the reservation price was unable to influence what reference price people used.