The impact of internal and external reference prices on brand choice: The moderating role of contextual variables

Abstract

The impact of internal reference price discrepancy (between actual price and internal reference price), and external reference price discrepancy (between actual price and external reference price) on brand choice is studied in two different contexts: whether the consumer faces a stockout condition at the time of purchase or not, and whether the consumer is a deal-prone consumer or not. Internal reference price is based on the past prices paid for the brand by the consumer, and external reference price is dependent upon the prices of all brands in the category at the point of purchase. Hypotheses are tested by estimating brand choice models using IRI scanner panel data for two product categories—saltine crackers and baking chips. Results indicate that, in general, the impact of the external reference price discrepancy on brand choice is greater than that of the internal price discrepancy. However, this varies depending upon the contextual conditions. For consumers facing a stockout condition at the time of purchase, and for deal-prone consumers, the impact of the external reference price discrepancy on brand choice is greater than that of the internal reference price discrepancy. However, for consumers not facing a stockout condition, and for non-deal-prone consumers, there is no difference in the impact of the internal and external reference price discrepancy on brand choice. Also, the impact of both the external and internal reference price discrepancy on brand choice is greater for consumers not facing a stockout condition at the time of purchase relative to facing a stockout condition, and for deal-prone consumers than for non-deal-prone consumers. Implications for pricing strategies are discussed for retailers, and limitations and extensions of this study are also provided.