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An empirical test of theories of price valuation using a semiparametric approach, reference prices, and accounting for heterogeneity

  • Yasemin Boztug
  • Lutz Hildebrandt

In this paper we estimate and empirically test different behavioral theories of consumer reference price formation. Two major theories are proposed to model the reference price reaction: assimilation contrast theory and prospect theory. We assume that different consumer segments will use different reference prices. The study builds on earlier research by Kalyanaram and Little (1994); however, in contrast to their work, we use parametric and semiparametric approaches to detect the structure of the underlying data sets. The different models are tested using a program module in GAUSS that was able to account for heterogeneity. The model types were calibrated by a simulation study. The calibrated modules were then used to analyze real market data.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-057.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-057.

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Length: 49 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2005-057
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  1. Wagner A. Kamakura & Byung-Do Kim & Jonathan Lee, 1996. "Modeling Preference and Structural Heterogeneity in Consumer Choice," Marketing Science, INFORMS, vol. 15(2), pages 152-172.
  2. Russell S. Winer, 1985. "Technical Note—A Price Vector Model of Demand for Consumer Durables: Preliminary Developments," Marketing Science, INFORMS, vol. 4(1), pages 74-90.
  3. Kalyanaram, Gurumurthy & Little, John D C, 1994. " An Empirical Analysis of Latitude of Price Acceptance in Consumer Package Goods," Journal of Consumer Research, University of Chicago Press, vol. 21(3), pages 408-18, December.
  4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  5. Biswas, Abhijit & Wilson, Elizabeth J. & Licata, Jane W., 1993. "Reference pricing studies in marketing: A synthesis of research results," Journal of Business Research, Elsevier, vol. 27(3), pages 239-256, July.
  6. 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.
  7. Krishnamurthi, Lakshman & Mazumdar, Tridib & Raj, S P, 1992. " Asymmetric Response to Price in Consumer Brand Choice and Purchase Quantity Decisions," Journal of Consumer Research, University of Chicago Press, vol. 19(3), pages 387-400, December.
  8. 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.
  9. Gurumurthy Kalyanaram & Russell S. Winer, 1995. "Empirical Generalizations from Reference Price Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages G161-G169.
  10. Edwards, Kimberley D., 1996. "Prospect theory: A literature review," International Review of Financial Analysis, Elsevier, vol. 5(1), pages 19-38.
  11. 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.
  12. Lakshman Krishnamurthi & S. P. Raj, 1991. "An Empirical Analysis of the Relationship Between Brand Loyalty and Consumer Price Elasticity," Marketing Science, INFORMS, vol. 10(2), pages 172-183.
  13. Urbany, Joel E. & Dickson, Peter R., 1990. "Prospect theory and pricing decisions," Journal of Behavioral Economics, Elsevier, vol. 19(1), pages 69-80.
  14. DeSarbo, Wayne S. & Kim, Youngchan & Fong, Duncan, 1998. "A Bayesian multidimensional scaling procedure for the spatial analysis of revealed choice data," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 79-108, November.
  15. repec:ner:tilbur:urn:nbn:nl:ui:12-361675 is not listed on IDEAS
  16. Lichtenstein, Donald R & Bearden, William O, 1989. " Contextual Influences on Perceptions of Merchant-Supplied Reference Prices," Journal of Consumer Research, University of Chicago Press, vol. 16(1), pages 55-66, June.
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