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Relative thinking in consumer choice between differentiated goods and services and its implications for business strategy

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  • Ofer H. Azar

Abstract

The article shows that when people consider differentiated goods or services that differ in price and quality, they exhibit a decision-making bias of ``relative thinking'': relative price differences affect them even when economic theory suggests that only absolute price differences matter. This result is obtained in four different consumption categories. Sometimes subjects are affected only by relative price differences (``full relative thinking'') and sometimes also by absolute price differences (``partial relative thinking''). This behavior has implications for various disciplines, and it is particularly relevant in models dealing with horizontal or vertical differentiation, optimal pricing, competitive strategy, or advertising.

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Bibliographic Info

Article provided by Society for Judgment and Decision Making in its journal Judgment and Decision Making.

Volume (Year): 6 (2011)
Issue (Month): 2 (February)
Pages: 176-185

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Handle: RePEc:jdm:journl:v:6:y:2011:i:2:p:176-185

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Related research

Keywords: relative thinking; consumer behavior; product differentiation; judgment and decision making.;

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Cited by:
  1. Azar, Ofer H., 2007. "The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs," MPRA Paper 4455, University Library of Munich, Germany.
  2. Azar, Ofer H., 2013. "Competitive strategy when consumers are affected by reference prices," Journal of Economic Psychology, Elsevier, Elsevier, vol. 39(C), pages 327-340.

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