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Do people think about absolute or relative price differences when choosing between substitute goods?

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  • Azar, Ofer H.

Abstract

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.

Suggested Citation

  • Azar, Ofer H., 2011. "Do people think about absolute or relative price differences when choosing between substitute goods?," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 450-457, June.
  • Handle: RePEc:eee:joepsy:v:32:y:2011:i:3:p:450-457
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    References listed on IDEAS

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    Cited by:

    1. Toshiaki Iizuka & Hitoshi Shigeoka, 2018. "Free for Children? Patient Cost-sharing and Healthcare Utilization," NBER Working Papers 25306, National Bureau of Economic Research, Inc.
    2. Ha, Jaehyun & Lee, Sugie & Ko, Joonho, 2020. "Unraveling the impact of travel time, cost, and transit burdens on commute mode choice for different income and age groups," Transportation Research Part A: Policy and Practice, Elsevier, vol. 141(C), pages 147-166.
    3. Fabrizi, Simona & Lippert, Steffen & Puppe, Clemens & Rosenkranz, Stephanie, 2016. "Manufacturer suggested retail prices, loss aversion and competition," Journal of Economic Psychology, Elsevier, vol. 53(C), pages 141-153.
    4. Inderst, Roman & Obradovits, Martin, 2019. "Competitive Strategies when Consumers are Relative Thinkers: Implications for Pricing, Promotions, and Product Choice," EconStor Preprints 253658, ZBW - Leibniz Information Centre for Economics.
    5. Tsui, Hsiao-Chien, 2012. "Advertising, quality, and willingness-to-pay: Experimental examination of signaling theory," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1193-1203.
    6. Douven, Rudy & van der Heijden, Ron & McGuire, Thomas & Schut, Frederik, 2020. "Premium levels and demand response in health insurance: relative thinking and zero-price effects," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 903-923.
    7. Azar, Ofer H., 2019. "Do fixed payments affect effort? Examining relative thinking in mixed compensation schemes," Journal of Economic Psychology, Elsevier, vol. 70(C), pages 52-66.
    8. Clark, Derek J. & Mathisen, Terje Andreas, 2020. "Salience in a simple transport market," Research in Transportation Economics, Elsevier, vol. 82(C).
    9. Lynn, Michael & Jabbour, Patrick & Kim, Woo Gon, 2012. "Who uses tips as a reward for service and when? An examination of potential moderators of the service–tipping relationship," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 90-103.
    10. Marin, Alejandra & Dass, Mayukh & Boal, Kimberly, 2019. "Critic-buyer effects on valuation of ambiguously appraised products," Journal of Business Research, Elsevier, vol. 103(C), pages 45-55.
    11. Azar, Ofer H., 2014. "Optimal strategy of multi-product retailers with relative thinking and reference prices," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 130-140.
    12. Nash, Jane Gradwohl & Rosenthal, Robert A., 2014. "An investigation of the endowment effect in the context of a college housing lottery," Journal of Economic Psychology, Elsevier, vol. 42(C), pages 74-82.
    13. Azar, Ofer H., 2013. "Competitive strategy when consumers are affected by reference prices," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 327-340.
    14. Helfrich, Magdalena & Herweg, Fabian, 2020. "Context-dependent preferences and retailing: Vertical restraints on internet sales," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 87(C).
    15. Lembregts, Christophe & Pandelaere, Mario, 2014. ""A 20% income increase for everyone?": The effect of relative increases in income on perceived income inequality," Journal of Economic Psychology, Elsevier, vol. 43(C), pages 37-47.
    16. Brian M. Mills & Michael Mondello & Scott Tainsky, 2016. "Competition in shared markets and Major League Baseball broadcast viewership," Applied Economics, Taylor & Francis Journals, vol. 48(32), pages 3020-3032, July.
    17. Benjamin Bachi, 2016. "Competition with price similarities," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(2), pages 277-290, October.

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