The locus effect on inertia equity
| Pages | 206-210 |
| DOI | https://doi.org/10.1108/10610420510601076 |
| Date | 01 May 2005 |
| Published date | 01 May 2005 |
| Author | Gewei Ye |
| Subject Matter | Marketing |
Pricing strategy & practice
The
locus
effect on inertia equity
Gewei Ye
Department of Marketing and E-Business at the College of Business and Economics, Towson University, Towson, Maryland, USA
Abstract
Purpose – The paper attempts to answer “Will the shift from the
locus
of self to
locus
of others impact the magnitude of loss aversion?” and “Will
different prices affect the self-other asymmetry in choice?”.
Design/methodology/approach – The design is a two (
locus
: self vs others) by two (anchoring price: $30 vs $90) between-subjects’ factorial with
both the
locus
of evaluation and the monthly service plan charges (anchoring prices) as the between-subjects’ factors.
Findings – The author finds that inertia equity is smaller when consumers evaluate peer customers than when they evaluate themselves to switch
brands. It is also found that the
locus
effect is applicable to brands at various prices.
Research limitations/implications – Further research should focus on the validations of the assumptions to support the empirical finding from the
theoretical perspective.
Practical implications – Price reductions should be made personally relevantto the consumer and price increases should be made relevant to other things.
Originality/value –The
locus
effect expands the assessment of loss aversion from one (self or other) to two dimensions jointly (self and other). It
demonstrates the impact of the
locus
of evaluation on the magnitude of loss aversion.
Keywords Prices, Perception, Loss aversion, Brand loyalty
Paper type Research paper
Introduction
Brand switching entails a process of losing old brands and
gaining new brands (van Heerde et al., 2003). It may be
induced by the difference of price perceptions on the old and
new brands. Inertia equity assesses the difference of price
perceptions for gaining the new brand and losing the used
brand. Inertia value results from loss aversion, which means
losses loom larger than equivalent gains (Kahneman and
Tversky, 1979, 2000).
Suppose you currently use Verizon (a major US wireless
firm) as your wireless service provider, with a monthly
payment of $60 for 600 peak minutes and unlimited night and
weekend minutes. For the same service, Cingular (another
major US wireless firm) would like to win you over by offering
a price reduction. Suppose you have no financial obligations
(e.g. year-long contracts) to stay with Verizon. How much
price reduction will induce you to switch to Cingular?
A small price reduction, say $1, may not be sufficient to
induce consumers to cond uct brand switching because
consumers hold a propensity to stay with the status quo
rather than change.
What is the minimum price reduction, or the just noticeable
difference of price, between the price from competitor brands
and the price of the brand the customer has typically been
using in the past (i.e. the anchoring price), to induce
consumers to switch? Say $15 will work in the case of
switching wireless firms with $60 monthly payment. The
amount of price difference to induce brand switching (e.g. the
“$15”) is coded as the inertia equity. The term “inertia”
means the propensity to stay with the status quo. The term
“anchoring” comes from Tversky and Kahneman (1974) to
reflect the biased evaluations towards reference points. The
relationship between consumer sensitivity (represented as
“inertia equity” in this article) and pricing has been
documented as a major field of pricing study, namely the
psychophysics of pricing (Monroe, 2003) although little has
been done with Prospect Theory (Kahneman and Tversky,
1979) in the field of pricing.
Prospect Theory is relevant to marketing and consumer
research because it is the foundation of one of two schools of
consumer and marketing research, i.e. behavioral decision
theory (Simonson et al., 2001). The other school is rooted in
social cognition (Wyer and Srull, 1986; Simonson et al.,
2001). In general, the school of behavioral decision theory
investigates choices (selections) with two or more options. On
the other hand, the school of social cognition investigates
judgments on or responses to an object (i.e. one option).
Owing to the asymmetry of valuing losses and gains
(Kahneman and Tversky, 1979, 2000), the difference of the
mental values (“psychologically richer” utility (Thaler, 1985))
The Emerald Research Register for this journal is available at
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The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1061-0421.htm
Journal of Product & Brand Management
14/3 (2005) 206–210
qEmerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/10610420510601076]
The author is very grateful for the help of the editors and two anonymous
reviewers.
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