Price promotions and their effect upon reference prices

Abstract

Purpose

The purpose of this study is to resolve inconsistencies in the literature about how one-time price promotions affect reference prices. Specifically, this study suggests that the measure of reference price used within a study (e.g. expected price or fair price) can affect the outcomes of that study.

Design/methodology/approach

This research uses three separate experiments, replicating and extending existing work, to simulate purchasing decisions for products in the context of a price promotion. Experiments allow careful control of the confounds presumed to cause the inconsistencies between studies.

Findings

Study 1 shows that measurement of different reference prices within the same experiment leads to carryover effects, which inflate the correlation between measures. Expected price and fair price appear to be conceptually and empirically distinct and should be measured separately to reduce design artifacts. Study 2 shows that one-time price promotions affect fair price, but not expected price, and Study 3 shows expected price and fair price converge after multiple promotions.

Research limitations/implications

Independent measurement of reference price concepts allows robust claims about their distinctiveness. These findings have implications for how reference price should be measured in survey research and for pricing and promotional strategy.

Originality/value

This research contributes by showing how the measure of reference price used affects the outcomes of price promotion studies. It does this through the replication and extension of past research. Replication allows greater confidence in the findings of past research, and testing the same findings under different conditions allows for the boundaries of existing research to be delimited and generalizations to be made.

Citation

Lowe, B., Chan Fong Yee, F. and Yeow, P. (2014), "Price promotions and their effect upon reference prices", Journal of Product & Brand Management, Vol. 23 No. 4/5, pp. 349-361. https://doi.org/10.1108/JPBM-01-2014-0485