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Applying the peak‐end rule to reference prices

Applying the peak‐end rule to reference prices Purpose – The objective of this paper is to propose and empirically test a potential mechanism for how consumers form reference prices. The proposed peak‐end rule of reference price formation says that reference prices are formed as a weighted average of the highest observed price and the most recent price. Design/methodology/approach – The authors argue why the peak‐end rule observed in satisfaction contexts may also apply to the process by which consumers form reference prices. They then test the proposed peak‐end rule using IRI scanner panel data for decaffeinated coffee. Findings – Fit and predictive validity of a choice model improves when a reference price term based on the peak‐end rule is added. While the most recent price has a greater impact on reference price, the effect of the highest observed peak price is also significant, managerially and statistically. Research limitations/implications – The study provides evidence for a novel and behaviorally plausible reference price formation process. Practical implications – Temporarily charging a high price has a longer‐lasting effect on reference price than would be suggested by other reference price models, which typically involve a quickly decaying lag effect. Temporarily charging a very high price to restore the reference price may therefore be a useful pricing tactic. Originality/value – While the peak‐end rule is amply supported as a mechanism by which consumers form global satisfaction judgements, its application to reference price formation is novel, and has some potentially useful implications. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Product & Brand Management Emerald Publishing

Applying the peak‐end rule to reference prices

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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
1061-0421
DOI
10.1108/JPBM-04-2013-0290
Publisher site
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Abstract

Purpose – The objective of this paper is to propose and empirically test a potential mechanism for how consumers form reference prices. The proposed peak‐end rule of reference price formation says that reference prices are formed as a weighted average of the highest observed price and the most recent price. Design/methodology/approach – The authors argue why the peak‐end rule observed in satisfaction contexts may also apply to the process by which consumers form reference prices. They then test the proposed peak‐end rule using IRI scanner panel data for decaffeinated coffee. Findings – Fit and predictive validity of a choice model improves when a reference price term based on the peak‐end rule is added. While the most recent price has a greater impact on reference price, the effect of the highest observed peak price is also significant, managerially and statistically. Research limitations/implications – The study provides evidence for a novel and behaviorally plausible reference price formation process. Practical implications – Temporarily charging a high price has a longer‐lasting effect on reference price than would be suggested by other reference price models, which typically involve a quickly decaying lag effect. Temporarily charging a very high price to restore the reference price may therefore be a useful pricing tactic. Originality/value – While the peak‐end rule is amply supported as a mechanism by which consumers form global satisfaction judgements, its application to reference price formation is novel, and has some potentially useful implications.

Journal

Journal of Product & Brand Management – Emerald Publishing

Published: May 24, 2013

Keywords: Pricing; Reference prices; Satisfaction; Peak‐end rule; Choice models; Customer satisfaction

References

  • Combining experiences over time: the effects of duration, intensity changes and on‐papers line measurements on retrospective pain evaluations
    Ariely, D.
  • Patterns of affective reactions to advertisements: the integration of moment‐to‐moment responses into overall judgments
    Baumgartner, H.; Sujan, M.; Padgett, D.
  • Contextual effects of reference prices in retail advertisements
    Biswas, A.; Blair, E.A.