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Behavioral pricing

Behavioral pricing by Hooman Estelani
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Price management is one of the most central and sensitive elements of the process of managing a successful brand. Even a small change in price can have a disproportionate change in profitability, thereby increasing the importance of accurate and scientific ways of determining optimal prices. Moreover, beyond the monetary aspects of price, studies suggest that price often sends profoundly meaningful signals to the market, buyers, and competitors, and may therefore, trigger changes in other components of a marketing program, such as advertising and promotions. As a result, interest in studying consumer response to prices is growing among both practitioners and academics.
Owing to the interest in consumer response to prices, a new branch of pricing, referred to as Behavioral Pricing, has witnessed notable growth in recent years. Behavioral pricing focuses on how consumers perceive and respond to prices and how their perceptions and subsequent behavior may be explained by underlying psychological phenomena. As such, this branch of pricing research significantly contrasts and in many cases challenges decades of “traditional” neoclassical economic research on price. The challenge to the neoclassical economic view of price is based on its often questionable assumptions, which limit its managerial and practical use for developing pricing strategies. For example, in the traditional economic perspective of price, consumers are assumed to be fully knowledgeable about prices of competitors, fully aware of the product’s underlying quality, and capable of storing and processing large amounts of product and nonproduct information. All these assumptions have been refuted by behavioral pricing research. Behavioral pricing consequently provides a new perspective on how consumers respond to prices. This new perspective has received considerable interest not only among academics but also among brand managers and practitioners interested in improving the profitability and market attractiveness of products they manage.
The growth of interest in the topic is clearly evident in the research output associated with behavioral pricing in both academic and non-academic journals and conferences over the past decade. The purpose of this Special Issue of the Journal of Product & Brand Management is to further expand the research output channels for pricing research, particularly from the behavioral perspective. Submissions were first solicited through a call-for-papers which resulted in a large number of manuscripts. The submissions were then subjected to a rigorous and detailed review process by a large team of reviewers who specialize in pricing. The resulting set of papers published in this Special Issue has been hand-picked by the reviewers and the editors based on their incremental contribution to the field of pricing, and are therefore, pioneering studies in their own context.
The first paper deals with implausibly high advertised reference prices, which can deceive consumers into believing that the actual price is more of a “bargain” that it actually is. Burman and Biswas find that an implausible price has a greater effect than a plausible one when prices in the product category are widely dispersed. This effect, however, is moderated by the individual’s need for cognition. Those with a high need for cognition are affected by a plausibly but not implausibly high advertised reference price, but those with a low need for cognition are affected by both. The next two papers investigate the price knowledge of consumers across cultures. Evanschitsky, Kenning and Vogel studied some 1,000 German consumers. They find that less than 50 percent of German consumers have any idea of the price of grocery items. Consumers’ estimates, however, are generally lower than the actual price, demonstrating the potential for retailers to implement price increases.
The study by Rosa-Diaz considers many potential factors that might influence the price knowledge of Spanish consumers. She finds that Spanish women and middle-aged consumers have the most accurate knowledge of prices. Whether consumers are married and have low income or education also has an indirect effect through their influence on gender and age.
Xing, Tang and Yang investigate the important new concern of Internet pricing. They show that, compared to multi-channel retailers, Internet-only retailers charge higher prices for electronics. Multi-channel retailers start with higher posted prices, but they then lower them with larger price promotions. Their data show that, contrary to common belief, price dispersion of electronics increased over time.
The final two papers present pricing models to aid managers in making optimal pricing decisions. The Silva-Risso and Bucklin model is designed to determine the effects of couponing activity on brand choice. They demonstrate that their model provides better results than previous ones. They also find that coupon users are more deal prone, less brand loyal, and more likely to have sufficient time to take advantage of coupon promotion. The final paper addresses the difficult question of how much added volume is required to maintain profits after a price decrease. Curry develops a model to determine the supply side costs incurred by increased volume. He extends iso-pricing modeling by showing how increased volume can both require added capacity and also generate possible savings from higher volume purchases.
The production of this Special Issue would not have been possible without the support of many individuals. It is important, however, to recognize the particular impact and contribution of the former editor, Kent B. Monroe. He not only developed the pricing focus of the Journal of Product & Brand Management but also provided decades of service to pricing research and trained countless number of pricing researchers. Without his contributions, the field of pricing would not be as advanced as it is today. The editors of the Special Issue would also like to thank Richard Whitfield of MCB for his outstanding support. In addition, much gratitude is due to the reviewers who have provided cogent, positive feedback on both the papers that have been selected and those that were not.

Previously published in: Journal of Product & Brand Management, Volume 13, Number 6, 2004

Emerald Publishing Limited; Read online
Title: Behavioral pricing
Author: Hooman Estelani; Sarah Maxwell

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