a comparative analysis of reference price models
TRANSCRIPT
Seminar Paper
In
Business Economics II / International Marketing Management
International Product and Price Management
Prof. Dr. Manfred König
University of Applied Sciences, Ludwigshafen am Rhein
"A Comparative Analysis of Reference Price Models"
By
Denisse Ivett Zamora Velazquez / Student ID: 613575
Issue due date: 11/04/2011
Abstract
A sizeable quantity of research proof has now accumulated in the reference price
literature. One part of research has identified the antecedents of reference price
and has determined their effects through experimentation. Others have calibrated
a diversity of reference price models on panel data and described the effects on
brand choice and other purchase decisions. However, researchers have differed
in their conceptualizations and so, in their modelling of reference price.
The goal of this seminar paper is to reveal the reference price concept, to point
out some reference price models (adaption-level theory, assimilation-contrast
theory and range-frequency theory) and to provide a better understanding of the
representation of reference prices. I therefore review the published literature on
the statements and evaluations of alternative reference price models. In this con-
text two models and thus two competing conceptualizations have been crystal-
lised:
1. According to adaption-level theory, consumers compare the target price
against the mean of the contextual set of prices.
2. According to range-frequency theory, consumers compare the target price
against all of the prices in the contextual set
Consistent with adaption-level theory, researches suggest that consumers´ previ-
ous purchase experiences, the current purchase context, and individual charac-
teristics of consumers influence some aspects of reference price formation, re-
call, and effects both directly or indirectly.
The assimilation-contrast theory was amplified by range and range-frequency
theory. Over a quantity of experimental conditions, range-frequency theory
provided the best account of the data, which supported the suggestion that con-
sumers save, recall, and use a rich collection of price information in the process
of creating price evaluations. Recent applications of those theories have shown
that the assimilation (i.e. evaluation) of a purchase price depends on the points of
the price distribution and on the frequency distribution of prices. Thus, consumers
not only have a sense of the range but also of the relative frequencies of prices
they have confronted.
I Table of Contents
Table of Contents…………………………………………..…….......................………I
1. Introduction.........................................................................................................1
2. The Reference Price Concept............................................................................2
2.1 Price evaluation relating to Reference Price................................................2
2.2 Characterization and Systematization..........................................................3
3. Reference Price Models.....................................................................................4
3.1 Adaption-Level Theory.................................................................................4
3.2 Assimilation-Contrast-Theory.......................................................................5
3.3 Range-Frequency Theory............................................................................7
3.1.1 The Range Concept..............................................................................7
3.1.2 The Frequency Concept........................................................................8
3.3 Anchor-Price Model – “Updating”.................................................................8
4. Comparative Studies of reference price models..............................................10
4.1 Hypotheses................................................................................................10
4.2 Experiments................................................................................................11
4.3 Results.......................................................................................................12
5. Conclusion........................................................................................................14
List of Figures……………………………....………….....................….................….II
References.............………………..……………………..........................….............III
1. Introduction
Price is one of the tools used in the Marketing Mix. This implies that for price
management it is important to understand the consumer perception of prices and
their evaluation, as price evaluations are substantial inputs to consumer de-
cisions such as what, where, when, and how much to buy (Alba et al. 1994;
Gupta 1988). It is broadly accepted that price evaluations involve some type of
comparisons. The consumer compares a stimulus price with some form of stand-
ard. He uses in the end this standard or reference point to evaluate the price level
of a product (Emery 1970; Monroe 1973). This comparison standard is often
transferred to "reference price." Knowledge about reference prices is essential for
understanding the behaviour of price-related demand. Two basic forms of com-
parison standards have been crystallised in the pricing literature (Definition und
Explanation are presented in the course of this paper). As the literature presents
various types of reference price, it offers as well a wide range of models, explain-
ing the price judgment as a result of the relation between price stimulus and ref-
erence price.
This seminar paper presents some reference price models with the intention to
provide a better understanding of the representation of reference prices and to
show how these prices are used by consumers in a price judgment situation.
The present seminar paper is structured as follows:
Chapter 2 (The Reference Price Concept) gives a short definition of the term ref-
erence price and go further into detail concerning its function in price evaluation
(Chapter 2.1). Chapter 2.2 shows two different categories of reference prices and
their characterizations in particular with the aid of systematization.
Chapter 3 presents four reference price models: the adaption-level theory, the
range-frequency theory, the assimilation-contrast theory and the anchor-price
model. Chapter 4 amplifies specially on the adaption-level theory and the range-
frequency theory with the intention to review two competing conceptualizations.
Chapter 5 draws a conclusion according to the comparison and give a forecast
for further possible research approaches.
Following flowchart images the procedure of this seminar paper so that the
reader obtains a content orientation.
(A) The theoretical Reference Price Concept
d2. retrospect
(B) Reference Price Models
(C) Empiricism
Comparative Studies of Reference price models
(D) Conclusion
d1: Conclusion of the emp. Data
(Figure 1: flowchart of the work, own abstract)
2. The Reference Price Concept
Reference prices are standard prices against which consumers evaluate the
purchase prices of the products they focus on (Monroe 1973).
2.1 Price evaluation relating to Reference Price
As mentioned above, a reference price serves as a judgmental anchor on which
the present price stimulus is evaluated. The underlying premise to the reference
price is that consumers do not judge prices absolutely, but only relative to the
reference price (Thaler 1985). The evaluation (Ψ pit) is thus given by the price
(Pit) of the product i in the period t in relation to the reference price (PRit)
currently “valid” (Pechtl 2005, p. 23):
(A) Ψ pit = Ψ (Pit; PRit) with Ψpit > Ψpit for PRit > PRit
Thus, a numerous identical price stimulus gets a different evaluation if the
reference price is different. Therefore the price evaluation (Ψ pit) in the valuation
2
function (A) turns out to be ceteris paribus better when the reference price is
higher (Prit > Prit´), because in relation to this reference price the current price
stimulus seems to be lower.
Equivalent to the dimensions of price evaluation the literature mentions a variety
of reference prices, which consumers may rely on (Chandrashekaran/Jagpal
1995; Klein/Oglethorpe 1987; Shirai 2003). The next Paragraph presents the
frequent common price dimensions.
2.2 Characterization and Systematization
In pricing literature it has been suggested to conceptualize reference price as
price expectation, which is based on contextual information or consumers’
memory. This is equivalent to the two basic:
External reference price (ERP) and Internal reference price (IRP) (Kopalle/
Lindsey-Mullikin 2003; Mayhew/Winer 1992).
When consumers evaluate a stimulus price by comparing it in a concrete judge
situation with an internal (memory based) price standard (e.g. the last price
paid), they are said to use an internal reference price.
When the comparison standard is a price stimulus, observed in the retail
environment (e.g. the price of a competitors brand) in a concrete judge situation,
then consumers are said to use an external (stimulus based) reference price.
Following figure extends this systematization:
- Of products in - Reservation price
the considered shop
- Of products in other shops - Budget price
- Of competing products - Costs price
Aggregation of price stimuli - Standard price/Market price
Inferential prices - Aspiration price
- Price of means scale value
on an evaluation dimension
(Figure 2: Systematization of reference prices, cf. Pechtl 2005, p. 24)
3
Reference Prices
Past prices Current prices
Intrinsic/Inferential reference prices
Price stimuli are onlyto be perceived
The first reference price category focuses on prices that the consumer perceived
(a purchase is not necessary) in the past, e.g. product prices in the currently
visited shop or other shops. The second category of reference prices includes
current price stimuli at time t, e.g. prices of competitor products. With regard to
prices of competing products it is expected to acknowledge a prominent
reference function to the market leader in a product category. In contrast to the
past or current prices, which the customer has only to perceive, the prices in the
third category imply mostly an aggregation of price stimuli; i.e. the demander
combines existing information to new referent prices (inferential reference prices).
The reservation price expresses the maximum payment reserves that a
demander is willing to pay for the product. The Budget price declares the amount
of money that a consumer planed to spend for the product (Mazumdar 1992).
This price is not necessarily as high as the maximum payment reserves. The
Cost price refers to the price fairness and is equivalent to the price a consumer
assumes to be economically viable for the supplier. The standard price
characterizes the price level seen as common, exemplary or average
(Lichtenstein et. al 1991) within a contextual set.
A consumer could also define price expectations (in terms of a forecast)
according to the perceived prices in the past (first category) and use them as
reference levels (aspiration price) to evaluate the currently offer price (Pechtl
2005).
3. Reference Price Models
In this section I itemize the most mentioned reference price models in literature
explaining the creation and/or updating of a reference price.
3.1 Adaption-Level Theory
A widespread conceptualization regards reference price as a predictive price ex-
pectation that is created by consumers’ previous experience and current pur-
chase environment (Briesch et al. 1997; Kalyanaram and Winer 1995). The theor-
etical justification for this conceptualization comes from adaptation-level theory
(Helson 1964), which argues that judgments are proportional to divergences from
a comparison standard.
4
This Standard or adaption level is context sensitive, as it is considered as the
mean of the stimuli presented within a contextual set (Helson 1964; Wedell 1995)
Following this view, the reference price that consumers use to evaluate a product
is a weighted average of the prices from the relevant category (Monroe 1990)
and is declared as “mean price perception” (Diller 1988). This might be equi-
valent to the standard price, which a consumer has in mind as reference price,
regarding the relevant product.
Competing products (j = 1,..., J) or perceived product prices in the past ( 1ז = ,…,
T) are possible relevant stimuli to create a reference or standard price in a
judgment situation. According to the adaption-level theory the evaluation of a
price stimulus i (Ψ pit) is proportional to the difference between price stimulus
and reference price PRit (Birnbaum 1974; Niedrich et al. 2001):
B) (Ψ pit) = b * (PRit – Pit), with b>0 and PRit = 1/J ∑ Pjt or PRit = 1/T ∑ Pit-ז
Condition B) represents a specific embodiment of condition A).
The conception that a demander evaluates a price stimulus based on the
(absolutely) difference to the reference price can be applied to all types of
reference prices (Pechtl 2005, p. 26). An extension of this model implies that the
current (competition price) stimuli, which are included in the reference price, are
weighted with the brand loyalty (Mazumdar/Papatla 1995). The result is that
frequently purchased products will receive greater weight in the reference pricing.
It seems plausible that over time further distant contacts don’t influence the
current reference price as much as recent price perceptions when the standard
price is based on the prices of the past (Butzug 2002). Other modelling
approaches do not only consider the mean of the current price stimuli (using for
evaluation), but the distribution of those prices as well (Büyükkurt 1986). That
should cover the consumers´ uncertainty in price evaluation (Müller 2001).
3.2 Assimilation-Contrast-Theory
The assimilation-contrast theory (Sherif and Hofland 1964)) from social psycho-
logy is part of the attitude survey and completes the adaptation level theory ex-
plained in chapter 3.1.
According to this theory, consumers compare the price of a product with previous
experiences concerning the price of that product or similar products. These ex-
5
periences accumulate an internal reference scale, i.e. a perceived range of “nor-
mal” prices in the market (standard price).
The consumer classifies a price stimulus as plausible (high), if it diverges slightly
from the reference price. This price impulse will be assimilated to the reference
price and obtains the same evaluation. Valuation insensitiveness is constituted in
this area. Kalwani and Yim (1992) find that consumers assimilate prices that are
within +- 4 % of the regular price of the brand.
The consumer perceives a divergence of the price stimulus from his reference
price, if the price stimulus deviates stronger from that reference price. Con-
sequently the customer perceives the price as “favourable” or “more expensive”
in comparison to his standard price. Such a noticeable, but still moderate differ-
ence between price stimuli and reference price leads to an evaluation that
changes proportional to this difference (in the mode of the adaption-level theory).
The contrast effect leads to an amplification of the valuated difference between
price stimulus and reference price, if the distinction is very high.
Han, Gupta ad Lehmann (2001) propose that the borderlines of assimilating
prices are “fuzzy” or probabilistic.
An interpretation of the assimilation-contrast theory (Blattberg/Neslin 1990) re-
veals that a change of the reference price is only possible, if the price stimuli
don’t deviate “too much” from the reference price. In that case the consumer clas-
sifies the price stimulus to a different context. He “contrasts” the current sales
price wherefore the reference price remains equal. Thus, an “updating” of the ref-
erence price (see chapter 3.3) occurs step by step, because high deviant price
stimuli do not lead to any change.
According to this theory, the amount and credibility of the price is crucial for
determining its influence on the reference price and the perception of a savings
or an increase in value. The assimilation-contrast theory implies for pricing policy
that price increases should be done in small steps so that consumers assimilate
the increased prices. Price reductions, however, have to be made in larger
amounts, so that demanders perceive it as a deviation (Botzug 2002) and
considered as “disproportionately advantageous”. Hence, the reference price
stays equal and the evaluation of following normal sales prices won’t be affected
3.3 Range-Frequency Theory
The assimilation-contrast theory (see chapter 3.2) was later augmented by range
6
theory (Volkmann 1995) and range-frequency theory (Parducci 1965) that make
predictions about the effects of the properties of the acceptable price range (e.g.
end points and distributions) on price judgment.
Range Theory (Volkmann 1951) could be categorized as an exemplar model in
which the cognitive representation is supposed to include only the highest and
lowest value in the contextual set. However price evaluations can be influence by
frequency conditions (Alba et al. 1994 and 1999; Kalwani and Yim 1992). Hence
it is important to consider ratings across contextual sets in which the range is
held constant and the mean is varied.
Parducci´s (1965) range-frequency theory is an exemplar model in which the
cognitive representation is assumed to include all prices in the contextual set.
Accordingly, the price evaluation (Ψpi) of product i is consisting of a range value
(ri) and a frequency value (fi) which cover the range and frequency concept in the
judgment of a stimulus (the range concept is presented in chapter 3.1.1, the
frequency concept is presented in chapter 3.1.2). The evaluation of pi (Ψpi)
results thus additively from the range value and the frequency value:
C) Ψpi = ω * ri + (1 – ω) * fi with 0 ≤ Ψpi, ω ≤ 1
The parameter expresses the weighting factor of both principles.
It is common to define ω = 0,5. This implies that the range and the frequency
principle influence the evaluation of equal importance. The range-frequency
theory represents an extension of the “elder” range theory and considers merely
the range principle in the evaluation, which implies in the term C) with ω = 1.
3.1.1 The Range Concept
The range principle postulates that the evaluation of the stimulus depends on its
position relative to the minimum and maximum expression of the stimuli within
the relevant contextual set. (P[min], P[max]). Therefore the reference prices in
the range-value (ri) are both extreme values (P[min], P[max]) of the price stimuli,
which underlie the evaluation of pi.
ri = P[max] – Pi / P[max] - P[min] with 0 ≤ ri ≤ 1
The more the submitted price of product i is away from the maximum price in the
relevant context, the higher is the range value and the better appears the price
7
evaluation, respectively. Moreover the condition implies that an identical price
stimulus achieves a minor range value in a contextual set with a slighter minimum
price (and a greater spread), despite the same average of the price stimuli.
3.1.2 The Frequency Concept
The frequency principle implies the ordinal position of the observed price stimulus
in the contextual set, which is measured by its ranking (rank(pi)). Taking into
account the total number of stimuli (J, iєJ), the frequency value for the price of
product i (fi) results as:
fi = rank(pi) – 1 / J – 1 with 0 ≤ fi ≤ 1 and rank(pi) = J for pi = P[min]
The more other price stimuli are inferior to pi in the contextual set, the higher is
the frequency value of price pi at a given total number of stimuli, despite identical
expression value and unchanged extreme values. In other words, a certain price
will still be estimated as “relatively good”, if it is lower than many other price
stimuli in the contextual set, even though it shows a considerable distance to the
minimal price.
Recent applications (see Chapter 4) of this theory have shown that the
assimilation (i.e. evaluation) of a purchase price depends on the points of the
price distribution (Janiszewski and Lichtenstein 1999) and on the frequency
distribution of prices (Niedrich et al. 2001)
3.3 Anchor-Price Model – “Updating”
A relevant issue concerning reference prices is their alteration over time. One of
the commonly accepted characteristics of the reference price concept is that
reference prices change in the course of time. This occurs when reference prices
are based on current, external price stimuli which are subject to changes or when
contextual sets are adopted as relevant price stimuli in a specific situation.
The Term D), the so-called anchor-price model, generates such an “updating” of
the reference price, valid in period t + 1 concerning the current price stimulus
(Briesch et al. 1997; Kucher 1987):
8
D) PRit + 1 = λ * PRit + (1 – λ) * Pit, with 0 ≤ λ ≤ 1
The parameter λ defines the effect of the current sales price (Pit) on the
reference price of the next period (PRit+1), i.e. how it changes the current
reference price (PRit). It remains steady if λ = 1 (PRit +1= Prit). The reference
price rises in the follow-up period (PRit+1) for λ<1, if the current sales price (Pit)
is higher than the current reference price. This applies analogue to a current
sales price that is lower than the current reference price. Thus, the reference
price alters accordingly to the sales price with time delay and mitigation (λ < 1).
The function D) can be converted into:
PRit = λ * PRit-1 + (1 – λ) * Pit-1 or PRit-1 = λ * PRit-2 + (1 - λ) * Pit-2
Sales prices dated further back have got a weaker influence on the reference
price level than “younger” sales prices. The reference price conforms gradually to
the higher sales price, thus the difference between sales price and reference
price (PRi – Pi) decreases over time. The consumer gets accustomed to the
higher price level and increasingly he perceives it as “normal”.
This tendency is also valid for price cuts:
A permanently lower sales price is only initially perceived as attractive, because
the references price decreases over time and the original price converts into the
standard price. A dynamic is generated as well by a once-only price alteration,
like a special price campaign. The reference price decreases due to such a
campaign. In the next period the normal price is consequently perceived as
inflated because the reference price is now lower. This difference shrinks in the
course of time, as the reference price approaches the primal (normal) sales price
again. Thus, a special offer has harmful impact to the evaluation of the
subsequent normal sales price (Pechtl 2005, p. 28).
In contrast to an interpretation of the assimilation-contrast theory (see chapter
3.2), the formula D) implies that every sales price in a certain period changes the
following reference price.
Price management could influence through price setting of “today” the price
evaluation of “tomorrow”, if reference prices result from past prices. According to
term D) the vendor might control the reference price of the consumer, indeed with
time and impact delay. Therefore, price setting has two divergent effects in a 9
certain period of time. A lower price “today” appears like a sales promotion on a
short-term basis but in the long term (“tomorrow”) it impedes the sales, because
of the declined reference price
4. Comparative Studies of reference price models
As each theory assumes a different cognitive representation of reference prices,
different conceptualizations are offered and a considerable sum of research
evidence has now accumulated in the reference price literature. Some
researchers have identified the antecedents of reference price and used
experimental methods to assess the effects of external stimuli on consumers’
internal reference price, price judgments, and other evaluations (e.g., Alba et al.
1999; Janizewski and Lichtenstein 1999). Others have calibrated alternative
reference price models on panel data and described the effects on brand choice
and other purchase decisions (e.g., Briesch et al. 1997; Niedrich 2001):
4.1 Hypotheses
However, the most quoted clarification of price judgment and reference price is
based on Helson´s (1947, 1964) adaption-level theory (see chapter 3.1), in which
the cognitive representation of reference price is the prototype of the relevant
category (Monroe 1990). Thus, this conceptualization is offered:
1. According to adaption-level theory, consumers compare the target price
against the mean of the contextual set of prices.
On the other hand, conceptualizations and empirical verification suggest the
possibility of a prototype model, which may be specified using Volkmann´s (1951)
range theory or Parducci´s (1965) range-frequency theory. Thus, this
conceptualization is offered:
2. According to range-frequency theory, consumers compare the target price
against all of the prices in the contextual set.
4.2 Experiments
10
In a sequence of four examinations, Janiszewski and Lichtenstein (1999)
compared Volkmann’s (1951) range theory to Helson’s adaptation-level theory.
In the main experiments they showed probands sets of prices that manipulated
the range while keeping the set mean constant. Test persons were then asked to
rate the attractiveness of the mean price. Janiszewski and Lichtenstein analysed
this data in ANOVA framework.
According to ANOVA Niedrich et al. (2001) specified in their work the limits of
testing contextual models using just the ANOVA construction. The contextual
models specific prognosticate judgments given a specific contextual set. The AN-
OVA tests for differences in ratings across experimental conditions and not for
differences between ratings and model predictions. Thus, the ANOVA might sus-
tain a model that does not fit the data. In an effort to overcome this limitation,
data analyses include in the work of Niedrich both the ANOVA and fits of specific
models. Furthermore, different models may fit the data better in different areas of
the distribution. Rather than evaluate only the mean, test persons evaluate nu-
merous target stimuli spaced at different intervals along the range. As mentioned
before Janiszewski and Lichtenstein (1999) compared ratings in contextual sets
in which the mean price was held unvarying and the range was changed. How-
ever, price evaluations can be influenced by frequency manipulations (Alba et al.
1994; Alba et al. 1999; Kalwani and Yim 1992). Thus, Niedrich also investigated
the complementary condition, comparing ratings across contextual sets in which
the range was held constant and the mean was varied. In addition to adaptation-
level theory and range theory, he also tested Parducci’s (1965) range-frequency
theory.
Theoretical predictions were tested by Niedrich et al. (2001) in a sequence of
three experiments:
Experiment 1 addressing the limitations previously mentioned. It contains two dis-
tinct tests of the three contextual theories. Test 1 extends the work of Jan-
iszewski and Lichtenstein (1999). Test 2 was not evaluated by Janiszewski and
Lichtenstein (1999) and provides a complementary test to the first by manipulat-
ing the mean price distributions while holding the range constant.
Experiment 2 tested whether a prototype model or an exemplar model better ac-
counted for the data. This experiment extends the first experiment by holding
both the range and the mean constant. This test is comparable to the experiment
of Birnbaum (1974) in testing contextual theories with numbers rather than prices.
He figured out that range-frequency theory offered a better account of judgments 11
of numbers than adaption-level theory. Experiment 2 tests whether a prototype or
an exemplar model of reference price offers a better account of consumer price
evaluations.
Experiment 3 tested the moderating affect of stimulus presentation on the relative
applicability of the models.
4.3 Results
The results from the examinations of Janiszewski and Lichtenstein (1999):
There were significant divergences between the attractiveness ratings of the
mean price in these distorted price sets. Range theory rightly predicted the direc-
tion of these divergences. On the other hand, adaptation-level theory cannot ex-
plain differences of price judgments in sets with the same mean. Based on these
data, analyzed in an ANOVA framework, Janiszewski and Lichtenstein deduced
that range theory is more consistent with the data.
The results from the examination of Niedrich et al. (2001):
Experiment 1:
Test 1 was consistent with the conclusions of Janiszewski and Lichtenstein
(1999) and implies that range theory provides a better account of the data than
adaption-level theory. Hence, this test supports the conclusion that the cognitive
representation of reference price might include the two prices that define the
range of the contextual set and not only the mean price. However, range theory
cannot account for the interaction between price and distribution. This interaction
was correctly predicted by the frequency effect. Hence, test 1 offers support for
range frequency theory and the exemplar conceptualization of reference price. In
test 2 the adaption-level theory provides a better account of the data than range
frequency-theory because the distribution main effect cannot be explained by dif-
ferences in the distribution range. The MANOVA results provided evidence that
the interaction and main effects were significant and showed the paradigm pre-
dicted by range-frequency theory. Further analysis of the models indicated that
both, the adaption-level and the range-frequency theory provide good fits to the
data. Hence, test 2 offers additional support for range-frequency theory and the
exemplar conceptualization of reference price.
Experiment 2:
Manipulating the arrangement of the two price sets was in order to test the rep-
resentation of reference price. Since the two distributions share the same range
and mean, range theory and adaptation-level theory expect no differences in the
12
attractiveness ratings between these two price sets. On the other hand, range-
frequency theory predicts an interaction between price and distribution. The hy-
potheses were evaluated using two isolated methods. The interaction between
price and distribution were both significant and in the direction predicted by
range-frequency theory. Model fitting showed that range-frequency theory
provides a significantly better fit to the data than range theory and is the only
model that can account for the crossover effect.
Experiment 3:
In summary, these data provide strong confirmation that price contexts, and thus
judgments, are moderated by the processing environment. Particularly, test per-
sons in the sequential presentation condition put more weight on extreme values
in the contextual set. In consequence, range effects are stronger in the sequen-
tial presentation condition and frequency effects are stronger in the simultaneous
presentation condition.
Statements for Hypothesis 1 and 2:
While range-frequency theory provided the strongest explanation for the experi-
ments performed in here, there were circumstances in which adaptation-level the-
ory and range theory provided very good results. In reference price sets including
only one or two values, all three models will provide the same fit. Further, all
three models will provide similar fits in larger reference price sets when the mean
and the middle of the contextual range are the same. One exception to this state-
ment was demonstrated in experiment 2, in which adaptation-level theory and
range theory could not explain differences in distribution modality. Furthermore,
adaptation-level theory may provide a comparatively good explanation of price
perceptions that are dominated by frequency effects, such as was found with ex-
ternal reference prices. On the contrary, range theory may provide a relatively
good explanation of price perceptions that are dominated by range effects, such
as was found for internal reference prices.
5. Conclusion
The purpose of this seminar paper was to give a general view of reference prices,
to provide a better understanding of the cognitive representation of reference
prices and to show how these prices are used by consumers in a price judgment
task. To deal with these questions, Volkmann’s (1951) range theory, Parducci’s
(1965) range-frequency theory, and Helson’s (1947, 1964) adaptation-level the-
ory were specially compared with each other (Niedrich et al. 2001; Janizewski
and Lichtenstein 1999). As mentioned before, every contextual model conceptu-
13
alizes reference price in a different way. Hence, support for one model provides
evidence in favour of the assumed reference price representation. Over a quant-
ity of experimental conditions, range-frequency theory provided the best results,
which supported the suggestion that consumers save, recall, and use a rich col-
lection of price information in the process of creating price evaluations. Con-
sumers not only have a sense of the range but also of the relative frequencies of
prices they have confronted. The observation of high values of the range weight-
ing in some conditions propose that the two prices defining the range may explain
the majority of reference price effects over time. In addition, the weight given to
the reference prices seems to depend on how these are experienced. Mazumdar
and Papatla (2000) find that the weight given to internal and external reference
prices may vary by product category. The findings underline the need to consider
range and frequency effects in the operationalization of reference prices in choice
models. However, it is not clear how many reference price categories consumers
use in evaluating price (Kalynaram and Winer 1995) The “behavioural pricing” re-
search assumes that consumer consult simultaneous several reference price
models to evaluate a price (Garbarino/Slonim 2003; Shirai 2003). Multiple refer-
ence prices propose that consumers might make multiple evaluations, which are
integrated into a single price evaluation of the brand. Though, it is not clear when
integration of this information happens. Furthermore, these findings propose that
reference price is an essential section of managerial decisions about pricing and
promotional strategies. There is an increasing awareness considering the im-
pacts of price promotions on category demand (Nijs et al. 2001), the enduring
profitability of companies, and brand equity (Dekimpe and Hanssens 1995; Je-
didi, Mela, and Gupta 1999). This stream of research can be amplified by includ-
ing reference price effects in the evaluation of the impacts of promotions on long-
term category extension (or contraction) as with profitability and the usual short-
term effects.
II List of Figures
Page
Figure 1: flowchart of the work………………………………………………….2
Figure 2: Systematization of reference prices
(cf. Pechtl 2005, p. 24)……………………………………………......3
III References14
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