Emerald Group Publishing Limited
Copyright © 2009, Emerald Group Publishing Limited
Article Type: Guest editorial From: Journal of Product & Brand Management, Volume 18, Issue 7
Back in 1995, the Marketing Science Institute hosted a conference on the “Behavioral Perspectives of Pricing”, co-chaired by Kent Monroe and Russ Winer. Reflecting the pricing concerns of the time, the main topics of the MSI Conference were reference prices, odd-ending prices, price promotions, bundling and brands. Now, nearly 15 years later, the significance of many of the topics presented at the conference has become widely accepted by practitioners and academics in the field of pricing.
In retrospect, what was most notable about the MSI Conference was that all the presentations focused on goods, most often packaged goods in both super markets and drug stores, but also running shoes, cars, computers and bicycles. The biggest change in the past 15 years is the trend away from pricing research dealing with the pricing of goods, toward new research on the pricing of services and electronically transmitted products. Today, manufactured goods are of a lesser concern than emerging questions, such as: how to price over the internet, how to price services, and how to price across cultures.
Of the five research papers presented in this special issue of the Journal of Product and Brand Management (JPBM) devoted to the behavioral aspects of pricing, three deal with pricing on the internet, two focusing on pricing across cultures (one of which also deals with the internet) and one with modeling the pricing of services. The concerns are how consumers respond to prices in the new electronic environment of the internet, how managers need to adjust their pricing strategies in different countries with different cultures, and how services can be priced to increase both the number of customers and profit margins.
Of the three articles related to the internet, the one by Biswas and Burman examines how the same factors can have very different effects depending on whether customers are shopping on-line or in a brick-and-mortar store. The authors consider both price dispersion and digitalization (meaning the ability to transmit products like music over the internet so that consumers can sample them prior to the purchase). The authors report greater price dispersion over the internet, which according to the Economics of Information Theory, should suggest that consumers would search more for a low price. They find, however, that consumers actually search less over the internet than when buying in retail stores.
The reasoning forwarded for this pattern of behavior is the greater transaction risks of shopping on-line, such as those presented by identify theft. Consumers lower such risk not by searching for the lowest price as they would if shopping in brick-and-mortar stores. Instead, they deal with a known on-line supplier. So despite the greater price dispersion, there is less consumer desire for price search in the on-line environment. The authors argue that there is also greater performance risk on-line since the consumer cannot see or touch the product being purchased. This risk is decreased when the good can be digitalized so that an on-line consumer can experience it. Consequently, the risk is lower than in a store setting where the product cannot be experienced. Therefore, the same factors have very different outcomes off-line versus on-line.
The results of this paper are further supported by the second article about pricing on the internet, by Biswas, Dutta and Biswas. These authors also explain changes in buyer behavior resulting form the greater risk of buying on-line. Their concern is the effectiveness of signals of quality (e.g., price, warranty, brand reputation). They investigate whether there is a difference in the effects of strong versus weak signals when the signals are used in on-line setting versus in a retail store. The authors find that due to the higher level of perceived risks in the on-line setting, a strong stand-alone signal like price has less credibility on-line. Their reason is that brick-and-mortar stores have a visible level of capital investment in real estate, inventory and sales personnel, which contributes to their credibility. To match this, on-line retailers must therefore invest heavily in a mix of signals: not just price but brand reputation, liberal warranty and return policies, and advertising. In particular, Biswas, Dutta and Biswas advise managers to invest in some “spectacular” signal such as a commercial that will demonstrate a visible investment by an on-line seller.
The third article dealing with the internet is concerned with price levels and price dispersion on-line versus in-store. Ancarani, Jacob and Jallat find that when shipping costs are included, prices on-line are higher than in-store prices. Price dispersion is also higher, which counters the idea of the Law of One Price across channels (LOOP). What is of particular interest in the Ancarani, Jacob and Jallat research is that they conducted it across cultures: in France and Germany, the two largest economies in Europe. They find that prices are consistently lower in Germany than France, with a greater degree of price dispersion in France than in Germany. They give possible reasons for the differences: the greater use of the internet in Germany than in France as well as the greater market share of large retailers, particularly discount retailers in Germany.
The other article looking at pricing across cultures is by Meng and Nasco. They investigate the measurement equivalence of a price perception survey in the United States, China and Japan. Using structural equations modeling, they find that a 21-item version of the 1993 scale developed by Lichtenstein, Ridgway and Netemeyer has a good fit across all three cultures. This being the case, they are able to demonstrate that respondents in all three countries are not significantly different in their value consciousness or price/quality schemas. There are, however, cultural differences. The Chinese are more sensitive to both price and prestige. The Japanese are very similar to the Americans except that Americans are more prone to value price promotions.
The final article by Ng deals with the pricing of services that have high fixed costs and short-term capacity constraints. Her focus is specifically on those services such as hotels and airlines that can be purchased either in advance or at the time of consumption. Ng develops a model that shows that the price of services sold in advance are always lower than those sold closer to consumption due to the fact that some of the services bought in advance but not consumed, can be resold. According to the model, it may be profitable for the seller to provide a refund to advance-buyers when they cannot use the service. Providing a refund could increase not only the number of buyers but the amount each one is willing to pay.
All the articles in this special JPBM special issue on Behavioral Pricing indicate the new frontiers of pricing which researchers are now exploring. They show that the internet has opened the potential for charging higher prices and the sampling of digitalized goods. They demonstrate that sellers have to be wary of the cultural forces that affect how consumers respond to prices. They indicate that allowing buyers a refund for unused services may actually be more profitable in the long run. These articles carry out the tradition of pricing research established at the 1995 MSI Conference.
The 1995 MSI Conference on the Behavioral Perspectives on Pricing launched the careers of the editors of this special issue: The Conference Summary was prepared by one of the guest editors of this JPBM special issue, Hooman Estelami. The other guest editor, Sarah Maxwell, presented a paper at the Conference. Both of us want to thank the many pricing researchers who submitted to this special issue as well as all the researchers who submit their work to JPBM. Your work demonstrates the continuing vitality and significance of research on the behavioral aspects of pricing.
We also want to thank the Editorial Board of the Special Pricing Section of the JPBM. The Board has over the years provided invaluable services to the field of pricing and has been instrumental in moving the pricing section of the journal forward. The support of the following reviewers is therefore gratefully acknowledged: Fabio Ancarani, Sundar Balakrishnan, Margaret Campbell, Rajesh Chandrashekaran, Amar Chema, Keith Coulter, Devon DelVecchio, Ellen Garbarino, Eric Greenleaf, David Hardesty, Andreas Hintenhuber, Kostis Indounas, Sharan Jagpal, Frédéric Jallat, Biljana Juric, Monika Kukar-Kinney, Rob Lawson, Dawn Lerman, Joan Lindsey-Mullikin, Rajesh Manchanda, Ken Manning, Pete Nye, Hans Pechtl, David Sprott, Rajneesh Suri, and Lan Xia.
We also gratefully acknowledge the continuing support of our advisory board: William Bearden, Dipankar Chakravarti, Dhruv Grewal, Sunil Gupta, Donald Lehmann, Kent Monroe, Robert Schindler, Joe Urbany and Russell Winer.
Sarah Maxwell, Hooman Estelami