Location of Repository

Analyzing the effects of past prices on reference price formation

By R.D. van Oest and R. Paap

Abstract

We propose a new reference price framework for brandchoice. In this framework, we employ a Markov-switching processwith an absorbing state to model unobserved price recall ofhouseholds. Reference prices result from the prices households areable to remember. Our model can be used to learn how many pricesobserved in the past are used for reference price formation.Furthermore, we learn to what extent households have sufficientprice knowledge to form an internal reference price. For A.C.Nielsen scanner panel data on catsup purchases, we find that theprices observed at the previous purchase occasion have an averagerecall probability of about 20%. Furthermore, the averageprobability that a household has sufficient price knowledge toform a reference price is estimated at about 30%. Even thoughprice recall is very limited the impact of reference priceformation on brand choice is substantial, and it is stronger thantwo popular alternative models in the literature suggest.Moreover, contrary to the two alternative models, our model doesnot suggest asymmetry between price gains and losses.brand choice;household scanner panel data;Markov switching process;reference price

OAI identifier:

Suggested articles

Preview

Citations

  1. 27McFadden D. (1974), \Conditional Logit Analysis of Qualitative Choice Behavior", in P. Zarembka (ed.), Frontiers in Econometrics, Chapter 4, Academic Press.
  2. Dynamic Linear Models with Markov-Switching", Journal of Econometrics, 60, 122.
  3. Kopalle P.K., A.G. Rao and J.L. Assuncao (1996), \Asymmetric Reference Price Eects and Dynamic Pricing Policies", Marketing Science, 15 (1), 6085.
  4. Krishnamurthi L., T. Mazumdar and S.P. Raj (1992), \Asymmetric Response to Price in Consumer Brand Choice and Purchase Quantity Decisions", Journal of Consumer Research, 19 (December), 387400.
  5. Lattin J.M. and R.E. Bucklin (1989), \Reference Eects of Price and Promotion on Brand Choice Behavior", Journal of Marketing Research, 26 (August), 299310.
  6. Mayhew G.E. and R.S. Winer (1992), \An Empirical Analysis of Internal and External Reference Prices Using Scanner Data", Journal of Consumer Research, 19 (June), 6270.
  7. Mazumdar T. and P. Papatla (2000), \An Investigation of Reference Price Segments", Journal of Marketing Research, 37 (May), 246258.
  8. McLachlan G.J. and T. Krishnan (1997), The EM Algorithm and Extensions, Wiley.
  9. Putler D.S. (1992), \Incorporating Reference Price Eects into a Theory of Consumer Choice", Marketing Science, 11 (3), 287309.
  10. Rajendran K.N. and G.J. Tellis (1994), \Contextual and Temporal Components of Reference Price", Journal of Marketing, 58 (January), 234.
  11. Ramaswamy V., E.W. Anderson and W.S. DeSarbo (1994), \A Disaggregate Negative Binomial Regression Procedure for Count Data Analysis", Management Science, 40 (March), 405417.
  12. Science, 14 (3), G161G169. Kamakura W.A. and
  13. Thaler R. (1985), \Mental Accounting and Consumer Choice", Marketing Science, 4 (3), 199214.
  14. Vanhuele M. and X. Dr eze (2002), \Measuring the Price Knowledge Shoppers Bring to the Store", Journal of Marketing, 66 (October), 7285.
  15. Wedel M., W.S. DeSarbo, J.R. Bult and V. Ramaswamy (1993), \A Latent Class Poisson Regression Model For Heterogeneous Count Data", Journal of Applied Econometrics, 8, 397411.
  16. Winer R.S. (1986), \A Reference Price Model of Brand Choice for Frequently Purchased Products", Journal of Consumer Research, 13 (September), 250256.

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.