On the Non‐Equivalence of Trade‐ins and Upgrades in the Presence of Framing Effect: Experimental Evidence and Implications for Theory

Abstract

Manufacturers of durable goods often buy back older versions of their products from customers to encourage them to switch to improved versions and to create control over product return streams in their closed‐loop systems. Classical models and conventional wisdom have long ignored that the framing of these buyback schemes, whether through trade‐ins or upgrades, can matter for theory. Using the reference‐point shift mechanism, we provide experimental evidence that the alternative frames are not equivalent and that the framing effect induces customers to change which prices they anchor to as their reference points for the price for their current version. We then use the experimental findings to extend a reference‐dependence version of the classical model of trade‐ins and upgrades and show how the behavioral extension modifies key predictions of the classical model and provides predictions more in line with today's durable goods markets.