IDEAS home Printed from https://ideas.repec.org/p/apc/wpaper/2017-106.html
   My bibliography  Save this paper

The Impact of Price Information on Consumer Behavior: An Experiment

Author

Listed:
  • Francisco B. Galarza

    (Universidad del Pacifico)

  • Gabriella Wong

    (Innovations for Poverty Action)

Abstract

We conduct blind tests to examine the connection between consumer’s choices and price differentials, for two goods with different levels of observable quality, bottled spring water and toilet paper (we pose that toilet paper’s quality is more easily observable). We gave subjects two samples of those goods, with no labels for their brands, but with two different prices. Given that the samples were exactly the same, we aimed at testing whether the price differentials influenced their perceptions of quality, for a given level of quality observability. The most striking result is that quality information inferred via price differentials have significant effects on consumer choices, when such difference is relatively high and quality is not easy to observe. Moreover, in such a case, prices shape the perceptions of quality: "If it is expensive, it tastes good". In contrast, when quality is easy to observe, we find no significant relationship between price differentials and perceived quality.

Suggested Citation

  • Francisco B. Galarza & Gabriella Wong, 2017. "The Impact of Price Information on Consumer Behavior: An Experiment," Working Papers 106, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:2017-106
    as

    Download full text from publisher

    File URL: http://perueconomics.org/wp-content/uploads/2014/01/WP-106.pdf
    File Function: Application/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    2. H. Leibenstein, 1950. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 64(2), pages 183-207.
    3. Goldstein, Robin & Almenberg, Johan & Dreber, Anna & Emerson, John W. & Herschkowitsch, Alexis & Katz, Jacob, 2008. "Do More Expensive Wines Taste Better? Evidence from a Large Sample of Blind Tastings," Journal of Wine Economics, Cambridge University Press, vol. 3(1), pages 1-9, April.
    4. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    5. Rao, Akshay R & Monroe, Kent B, 1988. "The Moderating Effect of Prior Knowledge on Cue Utilization in Product Evaluations," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 15(2), pages 253-264, September.
    6. Harold J. Leavitt, 1954. "A Note on Some Experimental Findings About the Meanings of Price," The Journal of Business, University of Chicago Press, vol. 27, pages 205-205.
    7. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(4), pages 647-658.
    8. Daniel McFadden, 2001. "Economic Choices," American Economic Review, American Economic Association, vol. 91(3), pages 351-378, June.
    9. Héctor Maletta, 2010. "La evolución del Homo economicus: problemas del marco de decisión racional en Economía," Revista Economía, Fondo Editorial - Pontificia Universidad Católica del Perú, vol. 33(65), pages 9-68.
    10. Francisco Galarza & Mauricio Power (ed.), 2012. "Economía experimental: nuevas metodologías para analizar el comportamiento individual," Books, Fondo Editorial, Universidad del Pacífico, edition 1, volume 1, number 12-01.
    11. Ding, Min & Ross, William T. & Rao, Vithala R., 2010. "Price as an Indicator of Quality: Implications for Utility and Demand Functions," Journal of Retailing, Elsevier, vol. 86(1), pages 69-84.
    12. Erickson, Gary M & Johansson, Johny K, 1985. "The Role of Price in Multi-attribute Product Evaluations," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 12(2), pages 195-199, September.
    13. Torsten Bornemann & Christian Homburg, 2011. "Psychological Distance and the Dual Role of Price," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 38(3), pages 490-504.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Inderst, Roman & Pfeil, Sebastian, 2014. "An "Image Theory" of RPM," MPRA Paper 54139, University Library of Munich, Germany.
    2. Rao, Akshay R & Monroe, Kent B, 1996. "Causes and Consequences of Price Premiums," The Journal of Business, University of Chicago Press, vol. 69(4), pages 511-535, October.
    3. G. E. Fruchter, 2009. "Signaling Quality: Dynamic Price-Advertising Model," Journal of Optimization Theory and Applications, Springer, vol. 143(3), pages 479-496, December.
    4. Vlaev, Ivo & Chater, Nick & Lewis, Rich & Davies, Greg, 2009. "Reason-based judgments: Using reasons to decouple perceived price-quality correlation," Journal of Economic Psychology, Elsevier, vol. 30(5), pages 721-731, October.
    5. Yang, Zhi & Cao, Xia & Wang, Feng & Lu, Chongyu, 2022. "Fortune or Prestige? The effects of content price on sales and customer satisfaction," Journal of Business Research, Elsevier, vol. 146(C), pages 426-435.
    6. Zheng, Dan & Chen, Yuxin & Zhang, Zhe & Che, Hai, 2022. "Retail price discount depth and perceived quality uncertainty," Journal of Retailing, Elsevier, vol. 98(3), pages 542-557.
    7. Jingze Jiang, 2016. "Peer Pressure in Voluntary Environmental Programs: a Case of the Bag Rewards Program," Journal of Industry, Competition and Trade, Springer, vol. 16(2), pages 155-190, June.
    8. Paul H. Jensen & Elizabeth Webster, 2006. "Market Power, Brand Characteristics and Demand for Retail Grocery Products," Melbourne Institute Working Paper Series wp2006n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    9. Erik Gronqvist & Douglas Lundin, 2009. "Incentives for clinical trials," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 18(5), pages 513-531.
    10. Erevelles, Sunil & Roy, Abhik & Yip, Leslie S. C., 2001. "The universality of the signal theory for products and services," Journal of Business Research, Elsevier, vol. 52(2), pages 175-187, May.
    11. Renato Soeiro & Alberto A. Pinto, 2023. "Negative network effects and asymmetric pure price equilibria," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 22(1), pages 99-124, January.
    12. Cuffaro, Nadia & Di Giacinto, Marina, 2015. "Credence goods, consumers’ trust in regulation and high quality exports," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 4(2), pages 1-19, August.
    13. Jang, Seongsoo & Chung, Jaihak, 2021. "What drives add-on sales in mobile games? The role of inter-price relationship and product popularity," Journal of Business Research, Elsevier, vol. 124(C), pages 59-68.
    14. Compeau, Larry D. & Grewal, Dhruv & Monroe, Kent B., 1998. "Role of Prior Affect and Sensory Cues on Consumers' Affective and Cognitive Responses and Overall Perceptions of Quality," Journal of Business Research, Elsevier, vol. 42(3), pages 295-308, July.
    15. Wendy Hui, 2010. "Brand, Knowledge and False Sense of Security," ICBBR Working Papers 12, International Centre for Behavioural Business Research.
    16. Laurent Reynald-Alexandre, 2007. "Probalilistic duopoly with differentiation by attributes," Working Papers halshs-00587847, HAL.
    17. Ashok K. Lalwani & Lura Forcum, 2016. "Does a Dollar Get You a Dollar’s Worth of Merchandise? The Impact of Power Distance Belief on Price-Quality Judgments," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 43(2), pages 317-333.
    18. Prietula, Michael J. & Watson, Harry S., 2008. "When behavior matters: Games and computation in A Behavioral Theory of the Firm," Journal of Economic Behavior & Organization, Elsevier, vol. 66(1), pages 74-94, April.
    19. Ding, Min & Ross, William T. & Rao, Vithala R., 2010. "Price as an Indicator of Quality: Implications for Utility and Demand Functions," Journal of Retailing, Elsevier, vol. 86(1), pages 69-84.
    20. Guido Candela & Massimiliano Castellani & Pierpaolo Pattitoni, 2012. "Tribal art market: signs and signals," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 36(4), pages 289-308, November.

    More about this item

    Keywords

    Price-quality; Experimental Economics; behavioral pricing; placebo effect; consumer decision-making;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:apc:wpaper:2017-106. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nelson Ramírez-Rondán (email available below). General contact details of provider: https://edirc.repec.org/data/peruvea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.