Durable goods pricing with reference price effects

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

1 Scopus Citations
View graph of relations

Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Journal / PublicationOmega (United Kingdom)
Online published13 Dec 2018
Publication statusOnline published - 13 Dec 2018

Abstract

A price benchmark shaped by consumers on the basis of their perception of past prices is known as a reference price. Behavioral decision research suggests that consumers are likely to be backward-looking in that they make purchase decisions based not only on the current price but also on the reference price. It is evident that the reference price effect, which has significant impact on consumer demand, exists for both consumables and durables. Yet, how this effect works has only been investigated in relation to the pricing of consumables, and thus the corresponding results are unable to yield normative implications for durable goods pricing where the saturation effect must enter the picture. This study aims to provide marketers of durables with relevant insights that can be practically used to guide their design of pricing strategies in the presence of the reference price effect. Specifically, we develop a dynamic pricing model which incorporates both the reference price effect and the saturation effect into a framework to broaden our understanding on the durable goods pricing problem. As the internet technology and social media have enhanced consumers’ ability to recall and compare past prices, the need for such a pricing model with backward-looking consumer behavior is increasingly compelling. Our results indicate that while it is optimal for a myopic seller to adopt the skimming pricing strategy, either the price skimming strategy or the penetration strategy is optimal for a forward-looking seller, contingent on the potential market and consumers’ reference price effects.

Research Area(s)

  • Durable goods, Dynamic pricing, Reference price effect, Saturation effect

Bibliographic Note

Full text of this publication does not contain sufficient affiliation information. With consent from the author(s) concerned, the Research Unit(s) information for this record is based on the existing academic department affiliation of the author(s).