Empirical Generalizations from Reference Price Research

TLDR

Reference price theory is well supported, with managers using it as an internal standard and consumers sensitive to losses relative to reference points. The paper proposes three empirically supported generalizations about reference pricing. The authors propose topics for further research on reference prices. Consumers use reference prices when choosing brands and rely on past prices to form reference points.

Abstract

Considerable theoretical justification for consumers' use of psychological reference points exists from the research literature. From a managerial perspective, one of the most important applications of this concept is reference price, an internal standard against which observed prices are compared. In this paper, we propose three empirical generalizations that are well-supported in the marketing literature. First, there is ample evidence that consumers use reference prices in making brand choices. Second, the empirical results on reference pricing also support the generalization that consumers rely on past prices as part of the reference price formation process. Third, consistent with other research on loss aversion, consumers have been found to be more sensitive to “losses,” i.e. observed prices higher than reference prices, than “gains.” We also propose topics for further research on reference prices.