Why offer lower prices to past customers? Inducing favorable social price comparisons to enhance customer retention

Price discrimination policies vary widely across companies. Some firms offer new customers the lowest price; others give preferential prices to their past customers. We contribute to the literature on price discrimination in behavior-based pricing by exploring how customers’ social price comparisons, i.e., comparing one’s price to that received by similar peers, impact the optimal structure of price discrimination. Social price comparisons have a negative (positive) impact on customers’ transaction utility if the price charged to past customers is higher (lower) than a new customer’s price. Using an analytical model with vertically differentiated firms, we show that a firm with relatively large market share will reward its past customers with relatively low prices when social price comparisons have a sufficiently large impact on utility. Furthermore, we find that social price comparisons lead to a relaxation of the price competition for new customers. Thus, both firms can earn higher profits when such comparisons are made than when they are absent. We also examine how other factors, such as horizontal competition and strategic customers, interact with social price comparison concerns to impact pricing strategies. Finally, we show how pricing behavior differs when price comparisons are based on historic reference prices rather than on peers’ prices.     

Quality signaling via strikethrough prices

Why do firms often advertise their current price together with their past price? Although consumers expect high quality products to have high prices, such firms may optimally charge lower prices when faced with low production costs. Thus in markets in which quality is difficult to ascertain and costs often fall over time, for example technology products, high quality firms may face a challenge of signaling their quality through current price alone. In this paper we develop a price signaling model in which uninformed consumers draw inference not only from the current price but also the prior period's price (the “strikethrough price”) if the firm chooses to disclose it. We find that a high quality firm benefits from using strikethrough pricing when the prior probability of high quality is relatively low while the probability of costs falling is relatively high.     

Quality-adjusted price comparison of non-homogeneous products across Internet retailers

This study compares prices offered by multiple Internet retailers. This task is challenging because e-tailers cannot present their entire assortments to each consumer. Therefore, the quality of the product assortments presented by different e-tailers to each consumer is not directly comparable on an item-by-item basis, resulting in non-homogeneous offerings across retailers. We further consider the interaction between retailers (product information presentation format) and consumers (product information search strategies), which makes price comparisons among the retailers even more non-homogeneous. To grapple with this quality-adjusted price comparison problem for non-homogeneous products, we use a stochastic-frontier hedonic-price regression model to find the “lowest” theoretical price for a product given its characteristics. We then assess the price efficiency of the product as the ratio between this lowest price and the offered market price. This framework allows for the comparison of retailers in their ability to offer the “best deals” even when their actual assortments are not directly comparable in quality. Moreover, this framework provides Internet retailers with a relative measure of price efficiency. This helps them understand when and where they offer competitive prices to consumers. We illustrate our approach empirically in a comparison of price efficiency among three major Internet travel agents on a sample of posted itineraries and airfares. Furthermore, we demonstrate that the price efficiency of an Internet travel agent depends on the format of its website and on consumers' search strategies.     

Pricing dynamics in US fresh produce channels: new empirical evidence

Despite many valuable contributions, prior research has not completely explained retail pricing behavior. This study employs scanner data for 36 fresh produce items analyzing the relationship between costs of goods sold and retail prices to provide further insight into retail pricing behavior. Implications include: (1) where ‘natural’ variation in produce prices do not already exist from the supplier, retailers appear to introduce the variation themselves, independent from shipping point price; and (2) to the extent that supplier-retailer contracts for fresh produce develop, the resulting stabilizing influence on costs may have the preserve effect of increasing retail price variability to consumers.     

Currency Substitution and Price Endings: Right Digit Effect

ABSTRACT

The strategic manipulation of prices. rightmost digits has been a tactic used by retailers in the western world for decades. By studying the internationalization of pricing tactics in a global economy, our research adds a much needed contribution to the literature of price endings and pricing tactics in global markets. We find that at lower price levels, consumers exposed to a 99 ending price in a currency substitution market are more likely to purchase the product compared to consumers in the US market. At higher price levels, on the other hand, consumers in either market situation exhibit no change in purchase intentions. Thus, the 99 ending tactic has no effect on consumers when the product is expensive. The use of the right digit effect by managers in a currency substitution/ dollarized economy as a way of persuading consumers to buy is still likely to be more successful compared to the USA market. As such, firms in a dollarized economy should structure their pricing strategies while taking into consideration the type of product they are offering and the consumer market they are dealing with.     

Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games

Firms in durable good product markets face incentives to intertemporally price discriminate, by setting high initial prices to sell to consumers with the highest willingness to pay, and cutting prices thereafter to appeal to those with lower willingness to pay. A critical determinant of the profitability of such pricing policies is the extent to which consumers anticipate future price declines, and delay purchases. I develop a framework to investigate empirically the optimal pricing over time of a firm selling a durable-good product to such strategic consumers. Prices in the model are equilibrium outcomes of a game played between forward-looking consumers who strategically delay purchases to avail of lower prices in the future, and a forward-looking firm that takes this consumer behavior into account in formulating its optimal pricing policy. The model outlines first, a dynamic model of demand incorporating forward-looking consumer behavior, and second, an algorithm to compute the optimal dynamic sequence of prices given these demand estimates. The model is solved using numerical dynamic programming techniques. I present an empirical application to the market for video-games in the US. The results indicate that consumer forward-looking behavior has a significant effect on optimal pricing of games in the industry. Simulations reveal that the profit losses of ignoring forward-looking behavior by consumers are large and economically significant, and suggest that market research that provides information regarding the extent of discounting by consumers is valuable to video-game firms.

Who pays for switching costs?

Earlier work characterized pricing with switching costs as a dilemma between a short-term “harvesting” incentive to increase prices versus a long-term “investing” incentive to decrease prices. This paper shows that small switching costs may reduce firm profits and provide short-term incentives to lower rather than raise prices. We provide a simple expression which characterizes the impact of the introduction of switching costs on prices and profits for a general model. We then explore the impact of switching costs in a variety of specific examples which are special cases of our model. We emphasize the importance of a short term “compensating” effect on switching costs. When consumers switch in equilibrium, firms offset the costs of consumers that are switching into the firm. If switching costs are low, this compensating effect of switching costs causes even myopic firms to decrease prices. The incentive to decrease prices is even stronger for forward looking firms.     

Pricing Policy and Partial Collusion

We study the pricing policy equilibria emerging in a partial collusion duopolistic framework where firms in the first stage of the game choose non-cooperatively the pricing strategy (perfect price discrimination or uniform pricing), and from the second stage onward collude on prices. We show that for intermediate discount factors and high firms’ asymmetry, the unique equilibrium is characterized by only the smaller firm choosing price discrimination. In the case of intermediate discount factors and low firms’ asymmetry, there are two possible equilibria: both firms price discriminate or no firm price discriminates. When the discount factor is particularly high or particularly low both firms price discriminate in equilibrium.     

Price competition during and after promotions

We provide a framework for setting regular prices and using promotional discounts in a duopoly where long‐term promotional effects are present and the firms' pricing and promotional strategies are common knowledge (e.g., as in online markets). We show that at equilibrium, the two firms may not promote and instead adopt an Everyday Low Price (EDLP) strategy. Consumers' tendency to stockpile promoted products, the level of brand loyalty and product differentiation, and the possibility of a postpromotional sales increase critically influence regular prices, price discount rates, and profits. Under some conditions consumer stockpiling intensifies promotional competition and reduces firms' profits while the possibility of attracting new consumers reduces the need to heavily promote and ensures better profits. Managerial implications are discussed. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.     

Pricing Experience Goods in Information Good Markets: The Case of eBusiness Service Providers

We study the pricing strategies of firms providing a service in experience good markets with switching costs. Using data on vendors providing “hosting and related services” at an early stage of the market, we test for pricing distortions that follow from oligopolistic competition with quality uncertainty and switching costs. We find that firms with a brand name charge a premium for their product – leveraging the reputation accumulated in closely related markets. As the theoretical literature suggests, we also find that the type of pricing distortions along the product line depends on consumers’ expectations about quality. If consumers underestimate the quality of the product, firms behave as if they discount introductory contracts in order to build trust, and later on markup upgraded contract. In contrast, firms that offer a quality level that is lower than consumers’ expectations markup initial contracts while discounting upgraded ones.     

Quality disclosure in the presence of strategic consumers

Consider a market for short-life products, such as smartphones, where a firm and consumers have asymmetric quality information, the firm sells products in two periods, and consumers make purchase decisions strategically. We investigate when a firm should disclose quality and the interaction between consumers' strategic behavior and the firm's disclosure behavior. We obtain several findings. First, regardless of whether consumers have low or high patience, the firm should disclose quality information if product quality is high and conceal it if product quality is low. However, for products with moderate quality levels, the firm will disclose more quality information to consumers with relatively high or low patience levels than when consumer patience is moderate. Second, firms will disclose less information when consumers behave strategically than when they are myopic. Third, when concealing quality information is an equilibrium, product prices are affected only by disclosure costs and independent of true product quality. Finally, the firm can benefit from consumers' strategic behavior and a higher disclosure cost, but greater patience might be detrimental to consumer surplus and social welfare.     

Dynamische Preissetzung — Wer profitiert?

In the context of digitalisation, recent approaches for automatic price adjustment are gaining importance. However, these approaches can affect consumer behaviour in a way which is disadvantageous for consumers, businesses and the state as a whole. In September 2016, consumer researchers met at the Heinrich Heine University in Düsseldorf in order to discuss the impact of dynamic pricing from the viewpoint of their research fields. As the articles make clear, the researchers found that dynamic pricing based on competitors’ prices is common, while personalised prices are extremely rare. The question arises as to what extent consumers consider dynamic prices unfair. The experts disagree about the necessity of a stricter legal regulatory framework. Furthermore, digital technology can be used to help consumers find their way through the complex online world. Ultimately, the question of who profits–the consumer or the trader–has not been settled. The discussants conclude that there is need for further research in many different research fields.     

The Impact of Violent Content on Pricing of Media Products

Although considerable research exists on the impact of exposure to violence on individual and group behavior, existing research has not examined how violent media are valued by consumers, specifically as it relates to the pricing and promotion of media products. In this study a total of 960 monthly price observations for video games and DVD movies were collected. Pricing data for the month of product launch as well as the months following the launch were compiled and subjected to ANOVA and regression analyses, to determine the role of violent content on both new and pre-owned prices. Consistent with the theoretical framework presented, the results indicate that violence can systematically impact prices, but the impact depends on the medium. In the video game market violent content contributes to a faster rate of price depletion, while in the DVD market it helps new product prices appreciate post-launch. The article concludes with a discussion of the implications of the findings for managers, public policy advocates, and researchers.     

Upgrade pricing, market growth, and social welfare

This paper studies the monopolist's dynamic pricing strategy when introducing successive generations of a durable product. We show that when consumers are semi-anonymous or exactly identified and the innovation is minor, the firm always offers an upgrade discount to former customers. However, the discount depends only on the quality of the old product. In contrast, for moderate and major innovations, the discount depends on the qualities and costs of both the old and the new products. The market growth rate affects the firm's pricing strategy only if consumers are anonymous; furthermore, the effect on prices depends on the discount rate and whether the market growth rate is high or low. For minor innovations, social welfare is maximized if consumers are anonymous. An interesting and paradoxical result is that, when innovations are moderate or major and consumers are semi-anonymous or exactly identified, price discrimination can actually lead to higher social welfare.     

A Micromodel of New Product Adoption with Heterogeneous and Forward-Looking Consumers: Application to the Digital Camera Category

We develop an empirical model for the adoption process of a new durable product that accounts for consumer heterogeneity as well as consumers forward-looking behavior. Accounting for heterogeneity is important for two reasons. As the mix of consumers with different preferences and price sensitivities could change over time, firms need to update their marketing strategies. Further, it allows for a variety of shapes for the aggregate adoption process over time. As prices for durable and technology products fall over time with firms continually introducing enhanced products, consumers may anticipate these prices and improvements and delay their purchases in the product category. Forward-looking consumers optimize purchase timing by trading off their utilities from buying the product and their expectations on future prices, quality levels, and brand availability. Such forward-looking behavior will result in price dynamics in the marketplace as price changes today influence future purchases. And it results in different shapes of the new product sales pattern over time by influencing the time to take-off. We show how the parameters of our model can be estimated using aggregate data on the sales, prices, and attributes of brands in a product category. We apply our model to market data from the digital camera category. Our data are consistent with the presence of both heterogeneity and forward looking behavior among consumers. At the product category level, we are able to decompose the effects of the entry of Sony into primary demand expansion and switching from other brands. At the brand level, we find that there exist several segments in the market with different preferences for the brands and different price sensitivities leading to differences in adoption timing and brand choice across segments. For a given brand, we show how the changing customer mix over time has implications for that brands pricing strategies. We characterize how price effects vary across brands and over time and how price changes in a given time period influence sales in subsequent periods. Model comparison and validation results are also provided.     

How price complexity takes its toll: The neglected role of a simplicity bias and fairness in price evaluations

Marketing managers commonly employ complex price plans. Surprisingly, limited and conflicting evidence reports how customers perceive and react to complex prices. This study examines perceptions about price complexity and shows that customers tend to prefer simple prices. Two experimental studies show that perceived price complexity negatively affects customer perceptions of price fairness and influences product choice because customers negatively evaluate the transparency of the firm's pricing practices and infer higher total prices. Customers comparing alternate offerings may therefore prefer simple over complex prices, even when the latter are less expensive. Study results suggest limiting price plan variations positively affects customer inferences about transparency and fairness, and thus customer choice.     

Per piece or per kilogram? Default-unit effects in retailing

Retailers offer a variety of products either per unit or per weight. Depending on the product category, consumers may find either one of these pricing strategies typical and the default. Especially online retailers are increasingly using unit-based prices, which is the non-default for many produce categories. So far, consequences resulting from non-default pricing strategies are unclear. This study addresses the questions of whether and how pricing strategies affect consumer behavior. In a series of four experiments, we show that default pricing strategies exist in the marketplace and that consumers prefer products that retailers offer using default pricing strategies. We also demonstrate that this behavior is due to uncertainty issues when assessing prices in non-default pricing strategies. Furthermore, we elaborate on the influence of weight expectations and explicitly stated weight information on this default-unit effect. The findings suggest that retailers can mitigate negative effects resulting from non-default pricing strategies by providing weight information.     

Psychological pricing: Myth or reality? The impact of nine-ending prices on purchasing attitudes and brand revenue

Price is the variable through which the value proposition of brands is monetize, therefore, it is the driver that guarantees the sustainability and profitability of companies. Among different psychological pricing tactics that exist, prices ending in nine are the most accepted and used by practitioners as a strategy to penetrate markets; but this strategy should be carefully revised and applied as it is context dependent and has differential effects among categories and types of brands. Drawing on the importance of psychological pricing, the extended use of nine-ending prices and the identified need of a better understanding, this study validates the impact of such prices on the purchasing attitudes of consumers and the differentiated effect on revenue, among various brands and product categories, finding that this tactic significantly affects consumers' purchasing attitudes and brands’ revenue levels, but to a different extent, depending on the product category, the brand positioning and preference.     

Everyday “low price” or everyday “value”? The interactive effects of framing and construal level on consumer purchase intentions

Academic literature uses the term “everyday low price” (EDLP) when referring to a pricing strategy that offers relatively stable, low prices across a wide assortment of product categories. However, in real-world situations, many brands and retailers opt to use a different term – “everyday value” (EDV). Do consumers differentially evaluate such framings of the same pricing strategy? The present research draws upon construal level theory and demonstrates – across two experimental studies – that EDV (vs. EDLP) framing is more effective among consumers with high (but not low) construal levels. This effect is mediated by perceived benefit such that consumers with high construal levels derive higher levels of perceived benefit when evaluating a product promoted with an EDV (vs. EDLP) framing. The findings of this research can be useful for marketers and retailers in promoting and framing the EDLP (or EDV) pricing strategies in their advertising and marketing communications.     

Manufacturer Mergers and Product Variety in Vertically Related Markets

We study the incentives of final product manufacturers to introduce new products into the market and the impact of a manufacturer merger on them. We show that when manufacturers distribute their products through multi-product retailers, a manufacturer merger, although it leads to an increase in the wholesale prices, it can enhance product variety. The merger induced product variety enhancement though arises only when vertical relations are present: when manufacturers sell directly their products to consumers, a merger never results in more product variety. Still, both with or without vertical relations, a manufacturer merger hurts consumers and decreases welfare.