Behavioral Aspects of Pricing

Question 1

Price Thresholds

Answer 1

1. Consumers perceive prices to be clearly higher (smaller) if they are above (below) a certain threshold (0.99 vs. 1.00 €)
2. Odd vs. even prices:
   a. Retail prices typically end in 9 cents/€ (9-ending prices)
   b. Reason: Retailers assume that price thresholds exist

Question 2

Level effects:

Answer 2

a. Consumers round prices down
b. Consumers compare prices from left to right
c. Consumers have limited memory capacity

Question 3

Image effects:

Answer 3

a. Price-image effect: Consumers view 9-ending prices as a signal of a price discount
b. Quality-image effect: Consumers view 9-ending prices as a signal of inferior quality

Question 4

Conclusions Regarding 9-ending Prices

Answer 4

2. If the existence of price thresholds is uncertain, it is better to assume that they exist.
   a. 9-ending prices are advantageous!
3. Exceptions:
   a. If price elasticity is very high and marginal costs are very low and thresholds affect very few consumers
   b. Strong quality-image effect (credibility)
   c. Convenience (avoid change)

Question 5

Reference Prices

Answer 5

1. General Idea: Consumers evaluate prices not in absolute terms, but relative to a reference price
2. Reference prices can be based on:
   a. Past prices
   b. Prices of other products
   c. Prices in other stores
   d. External reference prices
   e. Expected prices
3. Impact of reference prices can be asymmetric –> Prospect theory

Question 6

Prospect Theory

Answer 6

The shape of the value function incorporates three behavioral principles:

1. The value function is defined over perceived gains and losses relative to some natural reference point
2. The value function is assumed to be concave for gains (risk averse) and convex for losses (risk seeking)
3. The loss function is steeper than the gain function

Question 7

Price presentation

Answer 7

a. Silver lining principle: segregate small gains („silver linings“) from large losses
b. Segregate gains
c. Integrate losses

Question 8

Price changes

Answer 8

a. A price decrease should be emphasized more than a price increase
b. Communicate discounts together with external reference prices (e. g., suggested retail price)
c. Increase prices indirectly by downsizing the product
d. Combine price increases with product modifications
e. Use decoys –> see product line pricing

Question 9

Price Framing: Partitioned Pricing - definition

Answer 9

1. Framing: price effect depends on how price is communicated
2. Partitioned Pricing: divide total price into components
   a. Typical: base price + surcharge
   b. Examples: Airline: price for flight + tax , Online retailer: price for product + shipping & handling

Question 10

Price Framing: Partitioned Pricing - Pros and cons

Answer 10

Con:

a. Prospect theory –> integrate losses
b. “for free” –> positive affect

Pro:

a. Better ranking on price comparison sites
b. Consumers trade off accuracy of information with cognitive effort –> use heuristics, e.g.,
i. Anchoring & adjustment
ii. Ignore surcharge

Question 11

Study „Divide and Prosper“ - Study 1: auction experiment

Answer 11

a. Sealed bid for a jar full of pennies
b. Treatment variable: percentage fee on bid (yes/no)
c. Dependent variable: total cost of bid/perceived monetary value of pennies

Question 12

Study „Divide and Prosper“ - Study 2: telephone experiment

Answer 12

a. Choice between two brands of telephones (target sold from a catalog/alternative from store)
b. Treatment variable: target brand offered for $82.90 vs. $69.95 + $12.95 shipping & handling
c. Dependent variable: recalled cost

Question 13

Shipping fees (versus no fees)

Answer 13

a. Shehu/Papies/Neslin (2016): field data from a leading online retailer
b. Free shipping promotions encourage exploration –> higher return rate
c. Exploration effect decreases profitability of free shipping promotions by 56 %

Question 14

Threshold-based fee (versus fixed fee)

Answer 14

a. Evaluated as better (worse) if order value above (below) threshold (Koukova/Srivastava/Fischer-Steul 2012)
b. May increase order value
c. But more returns?

Question 15

Partitioned Pricing in the Airline Industry

Answer 15

1. Before November 2008:
   a. Common practice to offer dumping prices in ads and on entry webpages
   b. Extra charges during booking process for fuel, tax, …..
2. Since November 2008:
   a. EU Regulation: final price must be indicated from the beginning of the booking process
   b. Airlines still try to use partitioned pricing, e.g., by charging an extra credit card fee for all credit cards except MasterCard Prepaid (Ryanair) or VISA Electron

Question 16

Price Effects

Answer 16

1. Sacrifice component of price response:
   a. Allocative effect
   b. Transaction utility
2. Informational component of price response:
   a. Price-quality beliefs
   b. Prestige effect (= snob effect)
   c. Hedonistic effect