AN EMPIRICAL INVESTIGATION OF THE EFFECTS OF REFERENCE PRICES ON SALES
Abstract
The study of consumer response to price has been of interest to economists and psychologists for decades. This dissertation investigates the effects of prices by employing econometric models, extensively used by economists, to a model in which the variables are based on price perceptions, as suggested by psychologists. Specifically this research attempts to integrate these two approaches in modeling sales response to price by applying the concept of reference price and perceptual price judgement to an econometric analysis of panel data for three separate product classes: Catsup, Peanut Butter and Dish Detergents. The reference price concept is based on the theory of adaptation-level, and quantitatively the reference prices are operationalized by three different methods in our research, namely (i) last period's price, (ii) weighted log mean of the past prices, and (iii) adaptive expectation of the current price. The reference price theory was modeled and tested both at the aggregate and at the individual level. At the aggregate level seemingly unrelated regression procedure was utilized to estimate the association between the market shares and the pricing variables. At the individual level a multinomial logit formulation was employed in investigating the effects of reference prices on the individuals' purchase probabilities. Overall, the results from the aggregate analysis were consistent with the predictive tests based on the underlying theory. In the individual analysis the results were more mixed, mainly because of the inaccuracy of the data used.
Degree
Ph.D.
Subject Area
Management
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