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Impact of overlapping price ranges on psychological price perception revisiting the range theory of pricing (CD)

By: Jaikumar, Saravana.
Material type: materialTypeLabelBookPublisher: Ahmedabad Indian Institute of Management Ahmedabad 2016Description: 208 p.Subject(s): Consumers behavior | Price perceptionDDC classification: TH 2016-10 Summary: Abstract The context in which a product is seen has an impact on the behavior of consumers. Specifically the impact of the context provided by the most and least extreme values, i.e., the range of stimuli presented has been well documented. In the pricing context, the range theory posits that an individual’s evaluation of a product’s price depends on the range of prices observed. Prior research on range theory has demonstrated the effect of a single price distribution (by varying the range and frequency of values within the distribution) on consumer product and price evaluations. In this research, we examine a more realistic situation in which a consumer has to evaluate a product’s price in the presence of two or more price distributions whose anchors (end points) overlap. A consumer has to take into account two or more end points simultaneously to make judgments. Based on the tenets of ‘Regret Theory’, we develop ‘the overlapping ranges hypotheses’ and design a series of experiments to provide empirical evidence. We propose using the ‘eye-tracking method’ as a tool to illustrate the cognitive process in evaluating the overlapping price ranges. We develop a boundary condition for the ‘overlapping ranges hypotheses’ and argue that goal-directed behavior will inhibit the consumer from considering multiple ranges simultaneously. Finally, we consider multiple attributes of a product and take into account attribute tradeoffs across price ranges. Across five studies we provide experimental evidence supporting our hypotheses. Findings of this study have significant theoretical and managerial implications. THESIS ADVISORY COMMITTEE Prof. Arvind Sahay Prof. Sanjeev Tripathi Prof. Kirti Sharda Prof. Rajiv Vaidyanathan
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Table of Contents
Abstract .......................................................................................................................................... 3
Acknowledgements ......................................................................................................................... 4
List of Figures ............................................................................................................................... 13
List of Tables ............................................................................................................................... 14
Chapter 1 Introduction .................................................................................................................. 15
1.1 Background ......................................................................................................................... 15
1.2 Motivation ........................................................................................................................... 16
1.3 Implications ......................................................................................................................... 19
1.4 Organization of Chapters .................................................................................................... 20
Chapter 2 Literature Review – Reference Price ........................................................................... 21
2.1 Reference Price ................................................................................................................... 21
2.1.1 Modeling Stream .......................................................................................................... 22
2.1.2 Behavioral Stream ........................................................................................................ 23
2.2 Conceptualization of Reference Prices ............................................................................... 24
2.3 Theoretical Rationale .......................................................................................................... 25
2.3.1 Adaptation – Level Theory ........................................................................................... 26
2.3.2 Prospect Theory ............................................................................................................ 26
2.3.3 Assimilation and Contrast ............................................................................................ 27
2.3.4 Anchoring and Adjustment ........................................................................................... 28
2.3.5 Transaction Utility Theory ........................................................................................... 28
2.4 Shortfalls of Reference Price............................................................................................... 29
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Chapter 3 Literature Review - Range Theory of Price Perception ............................................... 30
3.1 Theoretical Basis ................................................................................................................. 30
3.1.1 Dual-Standards Model .................................................................................................. 30
3.1.2 Range – Frequency Theory........................................................................................... 31
3.1.3 Psychological Perspective and Attitude Change Model ............................................... 32
3.1.4 Norm Theory ................................................................................................................ 33
3.2 Range Theory ...................................................................................................................... 34
3.2.1 Range vs. Frequency Manipulation .............................................................................. 35
3.2.2 Evoked Range or Acceptable Price Range ................................................................... 36
3.2.3 Applicability of Price Ranges ....................................................................................... 37
3.3 Multi-Attribute Range Effects ............................................................................................. 38
3.4 Summary of Review and Research Gap .............................................................................. 40
Chapter 4 Hypotheses Development ............................................................................................. 42
4.1 Conceptualization of Price Perception ................................................................................ 42
4.2 Regret Theory ...................................................................................................................... 44
4.3 Framework of Regret Theory .............................................................................................. 44
4.4 Overlapping Ranges Hypotheses ........................................................................................ 45
4.4.1 Left Overlap .................................................................................................................. 46
4.4.2 Right Overlap ............................................................................................................... 47
4.5 Wide vs. Narrow Price Range ............................................................................................. 48
4.6 Price Processing using Eye Tracking .................................................................................. 50
4.6.1 Eye – Mind Hypothesis ................................................................................................ 51
4.6.2 Eye Tracking Methodology .......................................................................................... 51
7
4.6.3 Eye Tracking in Marketing ........................................................................................... 53
4.6.4 Eye Tracking Hypotheses ............................................................................................. 53
4.7 Goal-Directedness as Boundary Condition ......................................................................... 54
4.8 Attribute Trade - Off ........................................................................................................... 56
Chapter 5 Research Methodology ................................................................................................. 59
5.1 Overview of Studies ............................................................................................................ 59
5.1.1 Data Collection ............................................................................................................. 61
5.2 Study 0 – Perception of Overlapping Line Lengths ............................................................ 62
5.2.1 Experiment Design ....................................................................................................... 62
5.2.2 Procedure ...................................................................................................................... 62
5.2.3 Manipulation Checks .................................................................................................... 63
5.2.4 Results .......................................................................................................................... 64
5.3 Summary ............................................................................................................................. 65
Chapter 6 Study 1 –Overlapping Ranges Hypotheses .................................................................. 66
6.1 Operationalization of Price Range ...................................................................................... 66
6.1.1 Numbered Set of Prices ................................................................................................ 66
6.1.2 Discounted Prices for Same Product ............................................................................ 67
6.1.3 Prices in a Range „Not a Function of Quality‟ ............................................................. 68
6.2 Stimuli Selection ................................................................................................................. 68
6.2.1 Screen Size and Quality Perceptions ............................................................................ 68
6.2.2 Number of Prices in a Range ........................................................................................ 70
6.2.3 Presentation Order ........................................................................................................ 70
8
6.2.4 Presentation Format ...................................................................................................... 70
6.2.5 List of Stimuli ............................................................................................................... 72
6.3 Dependent Measures ........................................................................................................... 72
6.3.1 Measuring Price Attractiveness Ratings ....................................................................... 72
6.3.2 Measuring Evoked Range ............................................................................................. 73
6.4 Experiment Design .............................................................................................................. 74
6.5 Manipulation Checks........................................................................................................... 75
6.6 Expected Results ................................................................................................................. 76
6.7 Method and Procedure ........................................................................................................ 77
6.7.1 Participants ................................................................................................................... 77
6.7.2 Procedure ...................................................................................................................... 77
6.7.3 Measures ....................................................................................................................... 78
6.8 Price Attractiveness Ratings - Analysis and Results ........................................................... 79
6.8.1 Mixed ANOVA Assumptions ...................................................................................... 80
6.8.2 Comparing the Two Control Conditions ...................................................................... 81
6.8.3 Comparing Between Control and Treatment Conditions ............................................. 82
6.9 Evoked Price Range – Analysis and Results ....................................................................... 84
6.9.1 Left Control vs. Left Overlap ....................................................................................... 85
6.9.2 Right Control vs. Right Overlap ................................................................................... 86
6.10 Manipulation Check .......................................................................................................... 87
6.10.1 Post Experiment Interviews ........................................................................................ 88
6.10.2 Experiment.................................................................................................................. 88
6.11 Discussion ......................................................................................................................... 89
9
Chapter 7 Study 2 – Wide vs. Narrow Ranges ............................................................................. 91
7.1 Experiment Design .............................................................................................................. 91
7.1.1 Stimuli .......................................................................................................................... 92
7.1.2 Sample .......................................................................................................................... 92
7.2 Procedure and Measures...................................................................................................... 93
7.3 Analysis and Results ........................................................................................................... 94
7.3.1 Wide vs. Narrow Groups .............................................................................................. 95
7.4 Discussion ........................................................................................................................... 96
Chapter 8 Study 3 – Eye - Tracking .............................................................................................. 97
8.1 Experiment Design .............................................................................................................. 97
8.1.1 Stimuli .......................................................................................................................... 98
8.1.2 Sample .......................................................................................................................... 98
8.2 Procedure ............................................................................................................................. 98
8.2.1 Instructions and Sample Task ....................................................................................... 99
8.2.2 Calibration .................................................................................................................... 99
8.2.3 Main Task ..................................................................................................................... 99
8.3 Analysis and Results ......................................................................................................... 100
8.3.1 Manipulation Checks .................................................................................................. 100
8.3.2 Price Attractiveness Results ....................................................................................... 101
8.3.3 Fixation Times ............................................................................................................ 102
8.3.4 Number of Revisits ..................................................................................................... 103
8.4 Discussion ......................................................................................................................... 104
10
Chapter 9 Study 4 – Goal - Directed Behavior ........................................................................... 106
9.1 Experiment Design ............................................................................................................ 106
9.1.1 Stimuli ........................................................................................................................ 107
9.1.2 Operationalization of Goal - Directedness ................................................................. 107
9.2 Sample and Procedure ....................................................................................................... 107
9.2.1 Sample ........................................................................................................................ 108
9.2.2 Procedure and Measures ............................................................................................. 108
9.3 Analysis and Results ......................................................................................................... 109
9.3.1 Manipulation Checks .................................................................................................. 110
9.3.2 Assumptions of ANOVA............................................................................................ 111
9.3.3 Interaction Effect ........................................................................................................ 112
9.3.4 Simple Main Effects ................................................................................................... 113
9.4 Discussion ......................................................................................................................... 114
Chapter 10 Study 5 – Attribute Trade - Off ................................................................................ 115
10.1 Experiment Design .......................................................................................................... 115
10.1.1 Stimuli Selection....................................................................................................... 116
10.1.2 Operationalization of Attribute Trade - Off ............................................................. 118
10.1.3 Selection of Attribute Pairs ....................................................................................... 118
10.2 Sample and Procedure ..................................................................................................... 119
10.2.1 Sample ...................................................................................................................... 119
10.2.2 Procedure and Measures ........................................................................................... 120
10.3 Analysis and Results ....................................................................................................... 122
10.3.1 Manipulation Checks ................................................................................................ 122
11
10.3.2 Analysis Plan ............................................................................................................ 123
10.3.3 Results ...................................................................................................................... 124
10.4 Discussion ....................................................................................................................... 126
Chapter 11 Summary of Studies ................................................................................................. 128
11.1 Overview ......................................................................................................................... 128
11.1.1 Study 1: Overlapping Price Ranges .......................................................................... 128
11.1.2 Study 2: Wide vs. Narrow Ranges............................................................................ 130
11.1.3 Study 3: Eye Tracking .............................................................................................. 131
11.1.4 Study 4: Goal-Directedness ...................................................................................... 132
11.1.5. Study 5: Attribute Trade-off .................................................................................... 132
11.2 Summary ......................................................................................................................... 133
Chapter 12 Conclusions .............................................................................................................. 135
12.1 Theoretical Implications .................................................................................................. 135
12.2 Managerial Implications .................................................................................................. 139
12.3 Limitations and Further Research ................................................................................... 143
References .................................................................................................................................. 147

Abstract
The context in which a product is seen has an impact on the behavior of consumers. Specifically the impact of the context provided by the most and least extreme values, i.e., the range of stimuli presented has been well documented. In the pricing context, the range theory posits that an individual’s evaluation of a product’s price depends on the range of prices observed. Prior research on range theory has demonstrated the effect of a single price distribution (by varying the range and frequency of values within the distribution) on consumer product and price evaluations. In this research, we examine a more realistic situation in which a consumer has to evaluate a product’s price in the presence of two or more price distributions whose anchors (end points) overlap. A consumer has to take into account two or more end points simultaneously to make judgments. Based on the tenets of ‘Regret Theory’, we develop ‘the overlapping ranges hypotheses’ and design a series of experiments to provide empirical evidence. We propose using the ‘eye-tracking method’ as a tool to illustrate the cognitive process in evaluating the overlapping price ranges. We develop a boundary condition for the ‘overlapping ranges hypotheses’ and argue that goal-directed behavior will inhibit the consumer from considering multiple ranges simultaneously. Finally, we consider multiple attributes of a product and take into account attribute tradeoffs across price ranges. Across five studies we provide experimental evidence supporting our hypotheses. Findings of this study have significant theoretical and managerial implications.

THESIS ADVISORY COMMITTEE
Prof. Arvind Sahay
Prof. Sanjeev Tripathi
Prof. Kirti Sharda
Prof. Rajiv Vaidyanathan

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