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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.

Suggested Citation

  • Ofer H. Azar, 2011. "Relative thinking in consumer choice between differentiated goods and services and its implications for business strategy," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(2), pages 176-185, February.
  • Handle: RePEc:jdm:journl:v:6:y:2011:i:2:p:176-185
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Oben Ceryan & Ozge Sahin & Izak Duenyas, 2013. "Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility," Manufacturing & Service Operations Management, INFORMS, pages 86-101.
    2. Azar, Ofer H., 2013. "Competitive strategy when consumers are affected by reference prices," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 327-340.
    3. 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, pages 684-697.
    4. repec:oup:jeurec:v:15:y:2017:i:3:p:626-653. is not listed on IDEAS
    5. 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.
    6. Markus Dertwinkel-Kalt & Katrin Köhler & Mirjam R. J. Lange & Tobias Wenzel, 2017. "Demand Shifts Due to Salience Effects: Experimental Evidence," Journal of the European Economic Association, European Economic Association, vol. 15(3), pages 626-653.

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