Published

Beyond Posted Prices: The Past, Present, and Future of Participative Pricing Mechanisms

Customer Needs and Solutions

Driven by the low transaction costs and interactive nature of the internet, customer participation in the price-setting process has increased. Today, platforms such as eBay have popularized online auctions on a global scale, Priceline has made headlines with its name-your-own-price (NYOP) business model, and Humble Bundle has enabled independent musicians and game developers to market their works through pay-what-you-want (PWYW) pricing. Advertising exchanges conduct several hundred million individual auctions per day to sell online advertising slots. The present paper contributes to the literature on participative pricing in three ways. First, we propose a definition of participative pricing mechanisms, as well as a useful taxonomy. Second, we discuss the current understanding by synthesizing conceptual and empirical academic literature. Third, we outline promising research questions with a key focus on the related behavioral aspects of buyers and sellers.

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Money, Time, and the Stability of Consumer Preferences

Journal of Marketing Research

Consumers often make product choices that involve the consideration of money and time. Building on dual-process models, we propose that these two basic resources activate qualitatively different modes of processing: while money is processed analytically, time is processed more affectively. Importantly, this distinction then influences the stability of consumer preferences. An initial set of three experiments demonstrate that, compared to a control condition free of the consideration of either resource, money consideration generates significantly more violations of transitivity in product choice, while time consideration has no such impact. The next three experiments use multiple approaches to demonstrate the role of different processing modes associated with money versus time consideration in this result. Finally, two additional experiments test ways in which the cognitive noise associated with the analytical processing that money consideration triggers could be reduced, resulting in more consistent preferences.

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Price Promotion for Emotional Impact

Journal of Marketing

Managers and academics often think of price promotions merely as incentives that entice consumers to accept offers that they might not have considered otherwise. Yet the prospect of paying a lower price for a product of given quality can also discourage deliberation, in a sense “dumbing down” the purchase encounter by making it less consequential. The authors examine this possibility in a dual-system theory of consumer behavior. Specifically, they argue that price promotion lowers a consumer’s motivation to exert mental effort, in which case purchase decisions are guided less by extensive information processing and more by a quicker, easier, strong conditioner of preference: affect. Field data from a large daily deal company and four controlled experiments support this idea and document its implications primarily for product choice, in turn providing insight into the form and cause of brand switching that manufacturers and retailers can leverage to improve the allocation of promotional budgets and category management.

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The Discriminating Consumer: Product Proliferation and Willingness to Pay for Quality

Journal of Marketing Research

The authors propose that a crowded product space motivates consumers to better discriminate between options of different quality. Specifically, this article reports evidence from three controlled experiments and one natural experiment that people are prepared to pay more for high-quality products and less for low-quality products when they are considered in the context of a dense, as opposed to a sparse, set of alternatives. To explain this effect, the authors argue that consumers uncertain about the importance of quality learn from observing market outcomes. Product proliferation reveals that other consumers care to discriminate among similar alternatives, and in turn, this inference raises the importance of quality in decision making.

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The Impact of Add-On Features on Consumer Product Evaluations

Journal of Consumer Research

The research presented in this article provides evidence that add-on features sold to enhance a product can be more than just discretionary benefits. We argue that consumers draw inferences from the mere availability of add-ons, which in turn lead to significant changes in the perceived utility of the base good itself. Specifically, we propose that the improvements supplied by add-ons can be classified as either alignable or nonalignable and that they have opposing effects on evaluation. A set of four experiments with different product categories confirms this prediction. In addition, we show that the amount of product information available to consumers and expectations about product composition play important moderating roles. From a practical standpoint, these results highlight the need for firms to be mindful of the behavioral implications of making add-ons readily available in the marketplace.

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Attention Arousal through Price Partitioning

Marketing Science

Existing evidence suggests that preferences are affected by whether a price is presented as one all-inclusive expense or partitioned into a set of mandatory charges. To explain this phenomenon, we introduce a new mechanism whereby price partitioning affects a consumer’s perception of the secondary (i.e., nonfocal) benefits derived from a transaction. Four experiments support the hypothesis that a partitioned price increases the amount of attention paid to secondary attributes tagged with distinct price components. Characteristics of the offered secondary attributes such as their perceived value, relative importance, and evaluability can therefore determine whether price partitioning stimulates or hinders demand. Beyond its descriptive and prescriptive implications, this theory contributes to the emerging notion that pricing can transform, as well as capture, the utility of an offer.

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Price as a Stimulus to Think: The Case for Willful Overpricing

Marketing Science

Consumers aware of a new benefit will often experience uncertainty about its personal relevance or usage value. This paper shows that the decision to deliberate further to resolve this uncertainty and reach a polarized judgment of personal relevance critically depends on the posted price. In particular, a price above the consumer’s initial willingness to pay might be thought provoking and enhance the perception of relevance with a certain probability. This behavioral mechanism is introduced formally and by way of an experiment with reference to the purchase of organic lettuce and fair-trade coffee. Accounting for the effect of price as a stimulus to think, a monopolistic firm should either over price (“transgressive pricing”) or under price (“regressive pricing”) in comparison to the consumer’s willingness to pay. Under certain circumstances, the firm should also empower consumers with means that reduce the effort of deliberation.

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Work in progress

Consumer Resistance

This paper studies the impact of consumer resistance, which is triggered by deviations from a psychological reference point, on optimal pricing and cost communication. Assuming that consumers evaluate purchases not only in the material domain, we show that consumer resistance reduces the pricing power and profit. We also show that consumer resistance provides an incentive to engage in cost communication when consumers underestimate cost. While cheap communication does not affect behavior, persuasive communication may increase sales and profit. Finally, we show that a firm can benefit from engaging in operational transparency by revealing information about features of the production process.

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Price and Quality Decisions by Self-Serving Managers

We present a theory of price and quality decisions by a manager who is self-serving. In the theory, the firm emphasizes the price or quality of its product, but not both. Accounting for this choice of orientation, the self-serving manager credits success in the market to the dominant, “strategic” factor and blames failure on the other, as doing so is psychologically rewarding. However, biased attributions prompt biased responses, which damage future performance. The paper reports a series of experiments that support this logic and motivate our modeling effort. The model captures the phenomenon and clarifies the cost of the bias to the firm under different business conditions.

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When Discounting Backfires: Promotional Favors and Consumer Spending

Promotional favors are an increasingly popular but seldom researched form of price promotion, where the receipt of the saving depends on an action by consumers that is unrelated to the content of the purchase—such as completing a questionnaire, making a referral, or transacting online. This paper is the first to show that the tactic can backfire, in the sense that consumers exposed to a promotional favor choose cheaper or fewer options—they spend less—than they do in response to a standard discount. We document this effect across five experiments. Study 1 is a field test. Studies 2 to 5 replicate the result in more controlled settings, trace it to a process of psychological reactance, and address the alternative that promotional favors are simply less appealing. Finally, we relate our work to three literatures in marketing research and offer practical advice to businesses.

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Cashback is Cash Forward: Delaying a Discount to Encourage Future Spending

This paper examines purchase behavior in cashback shopping—a novel form of price promotion online where consumers initiate purchases at the website of a cashback company and, after a significant delay, receive the savings promised to them. We analyze panel data from a large cashback company and show that, over and above the predictable effect of cashback offers on initial demand, the later cashback payments further induce and increase future spending through the website. Specifically, at the average values in the data an additional $1.00 in cashback increases the likelihood of a future purchase by 0.02% and spending by $0.32. We consider three explanations for these effects, and the leading hypothesis is that consumers fail to treat money as a fungible resource. Finally, we discuss the implications of our findings for cashback companies and retailers.

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Putting Customer Back into Customization: A Pricing Intervention

The benefits of customization are not always self-evident to consumers who seek to minimize decision costs or are generally uncertain of what they really want. We argue that the mere posting of a starting price can increase a consumer’s readiness to appreciate customized goods. We discuss this phenomenon in the context of a simple model of reference-dependent preferences and propose four experiments to support our predictions. In experiment 1 and 2, we show that announcing a starting price accentuates consumer sensitivity to the match quality and relevance of customization, respectively, enhancing purchase intent and perceived product value to the extent that these qualities are present. Experiment 3 reveals that the effect of starting prices implicates the judgments of novices more so than those of experts. In experiment 4, we revert the effect and demonstrate that consumers who seek conformism and avoid personalization will be more likely to reject customized products when exposed to a starting price.

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