Focal and contextual components of price history as determinants of expected price
| Pages | 408-419 |
| Published date | 23 August 2011 |
| DOI | https://doi.org/10.1108/10610421111157937 |
| Date | 23 August 2011 |
| Author | Rajesh Chandrashekaran |
| Subject Matter | Marketing |
Pricing strategy & practice
Focal and contextual components of price
history as determinants of expected price
Rajesh Chandrashekaran
Silberman College of Business, Fairleigh Dickinson University, Teaneck, New Jersey, USA
Abstract
Purpose – This paper aims to investigate how consumers adjust their price expectations for brands in response to previously encountered prices. The
effects of two distinct components of price history, focal and contextual, are examined. The focal component represents the role of a brand’s own
previous price(s) in determining future price expectations. In contrast, the contextual component represents the impact of the prices of previously
considered competing brands.
Design/methodology/approach – A total of 60 subjects were enrolled to participate in a longitudinal, quantitative, survey-based study that required
them to provide information on brand perceptions, price expectations, brand consideration and choice.
Findings – Empirical comparison of several model formulations confirms that both components are crucial in explaining how consumers adjust their
price expectations in response to the prices of considered brands. Consistent with a wide body of research, a brand’s own previous price exerts the
greatest influence on price expectations. However, the extent to which contextual prices are assimilated depends on the composition of consumers’
consideration sets. Avenues for future research and implications for brand pricing and positioning are discussed.
Originality/value – The results offer several unique perspectives that stand out from (and build further on) previous research. First, although previous
research has examined the effects of competing brands’ current prices on brand choices, it has not incorporated the prices of competing brands that
may have been observed on previous shopping occasions. Second, measures and assesses the perceived variability within the consumers’ consideration
sets influences the impact of the contextual component on a brand’s current reference price.
Keywords Internal reference price, Price expectations, Prices, Consideration set composition, Consumers
Paper type Research paper
The idea that consumers assimilate previously paid prices to
form price expectations against which they evaluate future
prices has important managerial implications. On the one
hand, marketers can enhance the perceived attractiveness of
an offer by raising consumers’ price expectations, i.e. internal
reference prices (IRP). Alternatively, they can lower the sale
price temporarily so that it is evaluated favorably against
consumers’ anticipated prices. In theory, each of these
strategies can impact the way a consumer evaluates an offer,
and each has the potential to improve the odds that the
consumer will favor a particular brand over similar competing
offers. However, marketers are concerned that if the price
discounts are too large and/or too frequent, consumers may
lower their price expectations, and that may affect how
subsequent price offers are perceived. Therefore, before
marketers attempt to alter consumers’ price perceptions, it is
imperative that they understand the exact process by which
consumers form and update their price perceptions, which, in
turn, determines the perceived utility of an offer.
This article addresses the latter issue, i.e. how consumers
update their price expectations in response to previously
encountered prices. In contrast to previous research that has
traditionally studied how a brand’s own previous price
(defined here as the focal component of price history)
affects future price expe ctations, this study inclu des a
contextual component of price history that is based on the
previous prices of other brands in the consideration set. In
addition, it investigates how the composition of the set,
operationalized in terms of its perceived variability, affects the
assimilation of previously encountered contextual prices.
The following sections review the literature, outline the
motivation and study objectives, describe a conceptual model
and test alternative processes by which consumers update
their price expectations.
1. Defining and operationalizing internal
reference price
There is a vast amount of literature addressing the notion that
consumers evaluate observed prices by comparing them to
some internal standards (Monroe, 1973; Winer, 1986; Lattin
and Bucklin, 1989; Kalwani et al., 1990; Jacobson and
Obermiller, 1990; Urbany and Dickson, 1991; Mayhew and
Winer, 1992; Putler, 1992; Krishnamurthi et al., 1992;
Rajendran and Tellis, 1994; Kalyanaram and Little, 1994;
Chandrashekaran and Jagpal, 1995; Briesch et al., 1997;
Garbarino and Slonim, 2003). The underlying assumption is
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1061-0421.htm
Journal of Product & Brand Management
20/5 (2011) 408–419
qEmerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/10610421111157937]
408
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