Price Judgments Research Articles

Paying for no reason? (Mis-)perceptions of product attributes in separate vs. joint product evaluation

Consumer decision-making involves the evaluation of options either in isolation or in relation to other alternatives present at the environment. According to Hsee’s evaluability hypothesis, it is easier to evaluate product attributes when they are juxtaposed (i.e., presented jointly) than when they are presented in isolation from each other. Recent research has provided some support to the evaluability hypothesis for the attribute of perceived product quantity. The present research tests the hypothesis in relation to the attribute of perceived fairness. In two experiments, we show that when participants evaluate products in isolation from each other, they err in their judgment of product quantity, and, consequently, they mis-attribute fairness to the seller. In a third experiment, we further show that the inclusion of constant yet unfair price information does not affect the fairness and price judgments. These findings provide evidence for the psychological plausibility of the evaluability hypothesis for the attributes of fairness and product quantity. Moreover, they suggest that isolated product evaluation may be systematically suboptimal for consumers, even when pricing information is included. Therefore, effective consumer decision-making will benefit by allowing the joint evaluation of alternatives.

Assimilation and Contrast in Price Evaluations

How are price judgments influenced by the distribution of observed prices for other items in the same category? Processing goals will moderate price-judgment processes. When the processing goal is discrimination, price perceptions will be influenced by variations in range and ranks of prices in a distribution and contrast effects will be observed. For example, lowering the price of the lowest-priced product in a set will increase perceived expensiveness of higher-priced products. When the processing goal is generalization, however, price perceptions will be influenced by variations in the mean of the price distribution, in which case assimilation is observed. For example, lowering the price of the lowest-priced product in a set will decrease perceived expensiveness of higher-priced products. This latter finding is in sharp contrast to findings in the current literature on the effect of price structure on price judgments.

Overly Optimistic? Investor Sophistication and the Role of Affective Reactions to Financial Information in Investors' Stock Price Judgments

This study investigates the difference in unsophisticated and sophisticated investors' affective reactions to a firm's positive earnings announcement. The study also investigates the variation in the stock price judgments of these two groups as a result of a differential reliance on the affective reaction. It contributes to the literature by providing a further understanding of the differential interpretation and reaction to financial data by investors with varying levels of knowledge and experience. In the experiment, participants were asked to review background financial information about a company, evaluate the company's earnings announcement and make stock price judgments. Results indicate that unsophisticated investors interpret a positive earnings announcement as more favorable than do sophisticated investors. The affective reaction to the earnings announcement was more influential on the stock price judgments of unsophisticated investors when compared to the stock price judgments made by sophisticated investors. This differential effect leads unsophisticated investors to make stock price judgments that exceed stock price judgments made by sophisticated investors. From a back to basics standpoint, these results suggest that investment-related knowledge and experience play a significant role in how individual investors react to and rely on basic financial information, which may be of interest to standard setters and regulators.

Effects of volume on price judgments and quantity perception of snack foods

Effects of volume on price judgments and quantity perception of snack foods

Promotional Bundles and Consumers’ Price Judgments: When the Best Things in Life Are Not Free

A series of experiments examined the amount that consumers were willing to pay for products bundled together in a promotion. Describing one of the disparate products in the bundle as “free” decreased the price consumers were willing to pay for each product when sold individually. However, a “freebie” offer did not influence the overall price for the bundle of disparate products, a finding robust across two different settings and populations. The differential effect of freebies is explained by varying judgment difficulty, with the price being easier to arrive at for just a single product than for the combination. Consistent with this explanation, factors that influence judgment difficulty (the salience of the company’s motive for offering the freebie and time pressure to make a judgment) moderated the effects of a free offer on the amount consumers were willing to pay.

A study of reference‐price formation in value judgment

PurposeThe purpose of this paper is to examine the type and number of reference prices used and their formation process in consumers' price judgments across product and service categories.Design/methodology/approachA pretest of a group of 50 graduate students is conducted to determine the service and product stimuli. Questionnaires for shampoo and hair salons, respectively, are sent out to the employees in four different companies. The subjects are asked to provide information on five commonly used measures of reference price: price most frequently charged; lowest market price; fair price; normal price; and reservation price.FindingsAlthough consumers use the same process to evaluate the retail price, the number and types of internal reference prices (IRP) used by consumers for their price judgments are different. In the case of shampoo, consumers use the fair price and the normal price to determine the offer value. In the case of hair salons, consumers use the price most frequently charged, the fair price, and the normal price for their evaluation. The findings suggest that the relative importance of IRP differs between product and service categories.Research limitations/implicationsThis paper suggests that the relative importance of IRP differs between product and service categories. Further research is needed to determine if the findings also apply in different cultural environments.Practical implicationsThese findings have important implications for managers when creating price communication strategies, they should pay close attention to the specific reference prices and maintain these IRPs within a standard range when determining offer value.Originality/valueThis paper supports a multi‐dimensional view of reference prices and suggests the need to consider multiple reference prices when examining consumers' responses to price information.

Specifying Price Judgments with Range–Frequency Theory in Models of Brand Choice

To construct a price judgment, consumers compare a focal price with one or more reference prices. However, reference price operationalizations in the brand choice literature use single-point summary measures that cannot account for several distributional effects. To account for effects beyond the first moment of the reference price distribution, the authors specify price judgments in models of brand choice in accordance with range–frequency theory. The findings indicate that range–frequency price judgments provide a more complete specification of reference price effects and become more important with an increase in the second and third moments of a reference price distribution. The data also indicate that range effects are stronger for coupon users and frequency effects are stronger for consumers exposed to a trend of prices. The results have several implications for choice modeling, pricing theory, and pricing strategy.

Memory-Based Store Price Judgments: The Role of Knowledge and Shopping Experience

This paper investigates the processes underlying consumers’ memory-based store price judgments. The numerosity heuristic implies that the greater the number of relatively lower priced products at a store that consumers can recall, the lower will be their overall price image of the store. That is, people use the number of recalled low-price products to judge the overall store price image. We show that this expectation holds only for knowledgeable consumers. Instead, less knowledgeable consumers use the ease with which low-price products are recalled (i.e., the availability heuristic) as a cue to make store price judgments. Therefore, the fewer low-price products they recall, the easier their recall task, and the lower their price perceptions of the store. Field studies using different manipulations tested and confirmed these predictions. Managerial implications for retailers are offered. Theoretical implications for behavioral price perceptions, memory-based judgments, and the use of heuristic cues are also discussed.

A Comparison of Preferences and Perceptions of Alternate Equity Operationalizations

Seven operationalizations of equity that offer alternate criteria for allocating resources for leisure services were assessed using residents in a Texas city. The operationalizations were compensatory, equality, taxes paid, direct price, efficiency, advocacy and professional judgment. Two samples of data were selected using mail surveys of 903 households and by personal delivery and pickup at 200 additional minority households. A preference/perception grid showed professional judgment as being the only operationalization which received an above average score on both scales. Differences in residents' preferences and perceptions were related to gender, ethnicity and home value and not related to years of residence in the community or frequency with which residents used park and recreation services.

How do price range shoppers differ from reference price point shoppers?

Existing research demonstrates that reference price models can explain a significant amount of the variation in customers' price perceptions and purchase behaviors. This study extends the reference price literature by introducing the price range model, which proposes that price judgments are based on a comparison of the market price to the entire range of currently available prices. Our results demonstrate that the fit of a structural heterogeneity finite mixture model improves when the price range model is included along with internal and external reference price models and that the price range model explains a substantial proportion of customers' purchase histories in the toilet tissue category. Profile analysis indicates that internal reference price shoppers switch brands much less frequently than the other two segments and respond to feature promotions for their preferred brand(s). External reference price shoppers have an intermediate level of brand preference and respond significantly less than the other two segments to feature and display promotions. Price range shoppers have the lowest brand loyalty and respond most strongly to both feature and display promotions.

Judgments about judgments: The dissociation of consideration price and transaction commitment judgments.

There are many contexts in which people make judgments about prior judgments. For example, Internet shopping bots (e.g., NexTag.com) allow consumers to search for products and, if the price is too high, list a price at which they would consider making the purchase (i.e., base judgment). If the price drops to this level, the vendor generates an e-mail inviting the consumer to execute the transaction at the reduced price (i.e., contingent judgment). The authors show that the consideration price depends on the content of retrieved information, whereas the willingness to execute the transaction at the consideration price depends on the ease-of-retrieving the information. The authors use different offer prices to encourage the consumer to retrieve information consistent with different product quality levels. The authors also select offer prices so that information retrieval is more difficult at moderate offer prices than at high or low offer prices. Accordingly, the authors show that the consideration price increases as the offer price increases, but the willingness to execute the transaction at the consideration price is greater when there are high and low, as opposed to moderate, offer prices.

When Internal Reference Prices and Price Expectations Diverge: The Role of Confidence

When do internal reference prices differ from articulated price expectations? The authors propose that the internal reference price depends not only on the magnitude of the expected price but also on the confidence associated with this expectation. Four experiments delineate the effects of price expectation and confidence on the internal reference price. In Experiments 1 and 2, the authors manipulate repetition and examine the effects of repetition-induced confidence on price judgments. In Experiments 3 and 4, they manipulate confidence directly to investigate its effects on judgments. The results from all four experiments suggest that consumers with less confidence have higher internal reference prices than more confident consumers, even when they do not differ in their articulated price expectations. The authors discuss the implications of these results for pricing theory.

The effects of informative and non-informative price patterns on consumer price judgments

Converging evidence from laboratory experiments and empirical models of scanner data suggests that product price evaluations are often based on a comparison to an internal reference price. Research indicates that the reference price may reflect various characteristics of previously encountered prices including the mean, the range, and the last price encountered. In this research, the authors test whether, for prices purportedly sampled over time, the reference price reflects temporal patterns of the price sequence (ascending and descending prices). In four studies, participants viewed prices purportedly sampled at one time point or at multiple time points and then evaluated a target price. Price distributions differed only in their temporal pattern, whereas the mean, the range, and in some conditions, the last price, were held constant. The results reveal that the price pattern does not affect price judgments when prices are purportedly sampled at one time point. However, for ascending and descending price sequences purportedly sampled over time, the price pattern affects price judgments. Based on these findings the authors propose that consumers flexibly select the internal reference price used for price evaluations. © 2006 Wiley Periodicals, Inc.

A Reexamination of Frequency‐Depth Effects in Consumer Price Judgments

Previous research has shown that when there are multiple possible prices for two brands, the brand that is discounted frequently but at shallow levels is perceived to have a lower average price than the brand that is discounted infrequently but at deeper levels (the “frequency effect”). However, when there are only two possible prices for each brand, the brand discounted infrequently but at deeper levels is perceived to have a lower average price (the “depth effect”). Over a series of experiments, we demonstrate that these frequency and depth effects do not generalize to other temporal price distributions.

Fitting a Psychometric Function to Price Judgments: An Analysis of Consumers' Judgments for Discounted Prices

We examined a psychometric function of price judgment, comparing the mental ruler model, which predicted inverted S-shaped psychometric function, with a power function. Subjects, 102 citizens living in Japan, were asked to rate satisfaction with specified discounted prices. Analysis indicated that predictions of the mental ruler model gave a better fit than those of the power function.

Size Does Matter: The Effects of Magnitude Representation Congruency on Price Perceptions and Purchase Likelihood

The numerical cognition literature suggests that numerical stimuli (and hence prices) are represented and encoded in memory as magnitude representations (i.e., judgments of relative “size”). The magnitude representation associated with the numerical value of a price may be the same as (congruent) or different from (incongruent) the magnitude representation associated with some other related dimension. We conducted 3 experiments to examine the effects of congruent versus incongruent magnitude representations on price perceptions and purchase intentions. We find that congruent magnitude representations result in more favorable price knowledge (i.e., greater value perceptions and lower price judgments) and increased purchase likelihood. Our findings suggest that consumers are not consciously aware of the role of magnitude representations in influencing price perceptions.

The Effects of Pro Forma Earnings Disclosures on Analysts' and Nonprofessional Investors' Equity Valuation Judgments

This paper presents an experiment that examines the effect of pro forma earnings disclosures on the judgments of analysts (i.e., more sophisticated investors) and nonprofessional (i.e., less sophisticated) investors. In the experiment, participants developed stock price assessments after reviewing background financial information and a current earnings announcement for a company. The earnings announcement was manipulated to report only GAAP earnings in one condition and both pro forma and GAAP earnings in the other condition. Consistent with empirical evidence, the pro forma earnings in our experiment exceeded GAAP earnings. The results indicate that nonprofessional investors who received an earnings announcement that contained both pro forma and GAAP disclosures assessed a higher stock price than did nonprofessionals who received an announcement containing only GAAP disclosures. Financial analysts' stock price judgments were not affected by the pro forma disclosures. Followup analyses suggest that analysts and nonprofessional investors used different valuation models and information processing. Analysts used well-defined valuation models, based on either earnings-multiples or cash flows, while the nonprofessional investors were more likely to use simpler, heuristic-based valuation models. The pro forma disclosure did not cause nonprofessional investors to assess a higher earnings number for determining a stock price, but rather caused nonprofessionals to perceive the earnings announcement as more favorable, which in turn caused them to convert earnings or some other performance metric into a higher stock price. This effect appears to be due to unintentional cognitive effects, rather than nonprofessionals relying on pro forma earnings information because they perceived it to be informative.

Pro Forma Earnings Disclosures: Do Analysts and Nonprofessional Investors React Differently?

The increase in the number of firms disclosing pro forma earnings in their earnings announcements in addition to disclosing earnings calculated according to generally accepted accounting principles (GAAP) has prompted regulators, Congress, and the financial press to voice concerns about pro forma earnings. A major concern is that pro forma earnings disclosures affect less sophisticated and more sophisticated investors differently. This paper presents an experiment that examines the effect of pro forma earnings disclosures on the judgments of nonprofessional (i.e., less sophisticated) investors and analysts (i.e., more sophisticated investors). Consistent with empirical evidence, the pro forma earnings in our experiment exceeded GAAP earnings. The results indicate that nonprofessional investors who see an earnings announcement that contains both pro forma and GAAP disclosures assess a higher stock price than do nonprofessionals who see an earnings announcement that contains only GAAP disclosures, whereas analysts' stock price judgments are not affected. Follow-up analyses suggest that the differential effect of the pro forma disclosure is due to analysts and nonprofessional investors using different valuation models and information processing. Analysts used well-defined valuation models, based on either earnings multiples or cash flows, while the nonprofessional investors generally used simpler, heuristic-based valuation models. The pro forma disclosure also caused nonprofessionals to perceive the earnings announcement as more favorable, which in turn caused them to assess a higher stock price. This effect appears to be due to unintentional cognitive effects, rather than nonprofessionals relying on the pro forma earnings information because they perceived it to be informative.

Promotional Frames' Influence on Price Perceptions of Two Apparel Products

The way in which promotions are framed raises important questions about consumer price judgments. Promotional information may be presented or framed in many ways, each affecting consumers' behavioral responses differently. As promotions are costly, it is important to determine the effect of promotional frames on consumers' price perceptions both during and after the promotional period. This study explores the differences in price perceptions of two apparel products when promotions were framed as either a price discount or a gift‐with‐purchase. The majority preferred the off‐price promotion to the gift‐with‐purchase. Off‐price promotions lowered price perceptions more than did gifts‐with‐purchase, and participants with lower price perceptions were less likely to buy the apparel products at the original price after the promotional period ended. These results illustrate the importance of promotional framing in forming consumer price perceptions.

The Role of Brand Familiarity in Internal Reference Price Formation: An Accessibility-Diagnosticity Perspective

Very little research focused on the process by which internal reference prices are formed and used by consumers making price judgments. The accessibility-diagnosticity model is proposed as a parsimonious theoretical framework that resolves some conflicts in prior research and provides a foundation for future research on internal reference prices. This model is used to evaluate the role of brand familiarity and involvement on the formation and use of internal reference price standards. Empirical results show that (1) involvement is a better predictor of confidence in internal reference prices than brand familiarity, and (2) in forming internal reference price estimates, the offering price is discounted more for unfamiliar brands than familiar brands, but only when involvement is low. When involvement is high, the effect of brand familiarity on reference price estimates disappears. Implications for future research on internal reference price effects and for promotion practice are discussed.