How Consumers Respond to Price Information

Abstract

An important factor for understanding consumer behavior is learning how consumers use price information in their purchase decisions. In this article, we summarize knowledge that provides insights for understanding how consumers respond to price information. One of the prerequisites for knowing how consumers respond to price information is to understand how people perceive prices. An important extension of this knowledge concerns how customers form value judgments, given their price perceptions. It is these value judgments that determine the willingness of consumers to pay particular prices for the products and services they desire. The traditional model of consumer behavior assumes that the decisions of what to buy and how much to buy depend on (i) the prices of all goods; (ii) the level of income or amount of purchasing power; and (iii) the tastes and preferences of the consumer. Assuming perfect information about prices, a fixed level of income, and knowledge about tastes and preferences, the consumer maximizes satisfaction by minimizing the price paid for each purchase. This assumption of “rational behavior” implies that consumers (i) have perfect information about prices; (ii) are capable of perfectly processing this information; (iii) are not affected subjectively by price information; and (iv) are perfectly aware of their tastes and preferences. Assumptions (i), (ii), and (iv) are clearly not valid. Further, it would be expected that consumers' preferences or choices depend on how they evaluate the quality or benefits they receive from a product relative to the cost or sacrifice inherent in the price. Thus, consumers' perceptions of value represent a mental trade-off between the quality and benefits they perceive in the product relative to the sacrifice they perceive by paying the price. Perceived value is positive when perceptions of quality and benefits are greater than perceptions of sacrifice. Willingness to buy is positively related to perceived value. Keywords: price perceptions; acceptable price range; price thresholds; price–quality relationship; numerical cognition; price awareness; price fairness; perceived value; reference prices