Do people think about absolute or relative price differences when choosing between substitute goods?
The article presents experimental evidence that shows that people often consider relative price differences in addition to absolute differences when choosing between substitute goods. Because the choice between substitute goods is a very common one, this is an important finding. The experiment uses scenarios in various consumption categories: hotel rooms, flights, and books. Subjects were either students or participants in an economics conference. The data allow to reject the hypothesis that people think only about relative price differences in favor of the hypothesis that people think about both relative and absolute price differences. Whether the price given to the subjects is that of the high-quality good or of the low-quality good makes a large difference, a result that is related to the endowment effect and the status quo bias. Implications of the results for business strategy and other areas are also discussed.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
- Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-84, December.
- Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
- Ofer H. Azar, 2005.
"Relative Thinking Theory,"
- Azar, Ofer H., 2007. "Relative thinking theory," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(1), pages 1-14, February.
- repec:oup:restud:v:76:y:2009:i:2:p:451-469 is not listed on IDEAS
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
- Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
- Dan Ariely & Uri Gneezy & George Loewenstein & Nina Mazar, 2005.
"Large stakes and big mistakes,"
05-11, Federal Reserve Bank of Boston.
- Azar, Ofer H., 2008.
"The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs,"
Journal of Economic Psychology,
Elsevier, vol. 29(5), pages 684-697, November.
- 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.
- Camerer, Colin F. & Hogarth, Robin M., 1999.
"The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework,"
1059, California Institute of Technology, Division of the Humanities and Social Sciences.
- Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:32:y:2011:i:3:p:450-457. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.