A mathematical reformulation of the reference price
Reference prices have long been studied in applied economics and business research. One of the classic formulations of the reference price is in terms of an iterative function of past prices. There are a number of limitations of such a formulation, however. Such limitations include burdensome computational time to estimate parameters, an inability to truly account for customer heterogeneity, and an estimation procedure that implies a misspecified model. Managerial recommendations based on inferences from such a model can be quite misleading. We mathematically reformulate the reference price by developing a closed-form expansion that addresses the aforementioned issues, enabling one to elicit truly meaningful managerial advice from the model. We estimate our model on a real world data set to illustrate the efficacy of our approach. Our work is not only important from a modeling perspective, but also has valuable behavioral and managerial implications, which modelers and non-modelers alike should find useful. Copyright Springer Science+Business Media, LLC 2012
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.:
- Kamins, Michael A & Dreze, Xavier & Folkes, Valerie S, 2004. " Effects of Seller-Supplied Prices on Buyers' Product Evaluations: Reference Prices in an Internet Auction Context," Journal of Consumer Research, University of Chicago Press, vol. 30(4), pages 622-28, March.
- Briesch, Richard A, et al, 1997. " A Comparative Analysis of Reference Price Models," Journal of Consumer Research, University of Chicago Press, vol. 24(2), pages 202-14, September.
- Wolfgang Jank & P. K. Kannan, 2005. "Understanding Geographical Markets of Online Firms Using Spatial Models of Customer Choice," Marketing Science, INFORMS, vol. 24(4), pages 623-634, December.
- Winer, Russell S, 1986. " A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, University of Chicago Press, vol. 13(2), pages 250-56, September.
- Heath, Timothy B & Chatterjee, Subimal & France, Karen Russo, 1995. " Mental Accounting and Changes in Price: The Frame Dependence of Reference Dependence," Journal of Consumer Research, University of Chicago Press, vol. 22(1), pages 90-97, June.
- Praveen K. Kopalle & Ambar G. Rao & João L. Assunção, 1996. "Asymmetric Reference Price Effects and Dynamic Pricing Policies," Marketing Science, INFORMS, vol. 15(1), pages 60-85.
- Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
- P. K. Kannan & Gordon P. Wright, 1991. "Modeling and Testing Structured Markets: A Nested Logit Approach," Marketing Science, INFORMS, vol. 10(1), pages 58-82.
- Peter M. Guadagni & John D. C. Little, 1983. "A Logit Model of Brand Choice Calibrated on Scanner Data," Marketing Science, INFORMS, vol. 2(3), pages 203-238.
- Marcus Cunha Jr. & Jeffrey D. Shulman, 2011. "Assimilation and Contrast in Price Evaluations," Journal of Consumer Research, University of Chicago Press, vol. 37(5), pages 822 - 835.
- Janiszewski, Chris & Lichtenstein, Donald R, 1999. " A Range Theory Account of Price Perception," Journal of Consumer Research, University of Chicago Press, vol. 25(4), pages 353-68, March.
When requesting a correction, please mention this item's handle: RePEc:kap:mktlet:v:23:y:2012:i:3:p:839-849. 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: (Guenther Eichhorn)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.