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Customer Experience Management in Retailing: An Organizing Framework

A substantial body of research evidence has now accumulated in the reference price literature. One stream of research has identified the antecedents of reference price and has assessed their effects through experimentation. Others have calibrated a variety of reference price models on panel data and reported the effects on brand choice and other purchase decisions. In this article, the authors review the published literature on reference price in both the behavioral and modeling streams. They offer an integrative framework to review prior research on (1) the formation of reference price, (2) retrieval and use of reference price, and (3) influences of reference price on various purchase decisions and evaluations. In doing so, the authors examine the influences of consumers' prior purchase history and contextual moderators, such as specific purchase occasions, promotional environment of the store, and product category characteristics. They summarize the key findings, identify the unresolved issues,...

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Reference Price Research: Review and Propositions

We consider the dynamic pricing problem of a monopolist firm in a market with repeated interactions, where demand is sensitive to the firm's pricing history. Consumers have memory and are prone to human decision-making biases and cognitive limitations. As the firm manipulates prices, consumers form a reference price that adjusts as an anchoring standard based on price perceptions. Purchase decisions are made by assessing prices as discounts or surcharges relative to the reference price in the spirit of prospect theory.

We prove that optimal pricing policies induce a perception of monotonic prices, whereby consumers always perceive a discount, respectively surcharge, relative to their expectations. The effect is that of a skimming or penetration strategy. The firm's optimal pricing path is monotonic on the long run, but not necessarily at the introductory stage. If consumers are loss averse, we show that optimal prices converge to a constant steady-state price, characterized by a simple implicit equation; otherwise, the optimal policy cycles. The range of steady states is wider the more loss averse consumers are. Steady-state prices decrease with the strength of the reference effect and with customers' memory, all else equal. Offering lower prices to frequent customers may be suboptimal, however, if these are less sensitive to price changes than occasional buyers.

If managers ignore such long-term implications of their pricing strategy, the model indicates that they will systematically price too low and lose revenue. Our results hold under very general reference dependent demand models.

Dynamic Pricing Strategies with Reference Effects

The Role of Big Data and Predictive Analytics in Retailing

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Credibility: A multidisciplinary framework

We consider a group of frequently purchased consumer brands which are partial substitutes and examine two situations; the first where the group of brands is managed by a retailer, and second where the brands compete in an oligopoly. We assume that demand is a function of actual prices and reference prices, and develop optimal dynamic pricing policies for each situation. In addition to researchers studying pricing strategy, our results may interest retailers choosing between hi-lo pricing and an everyday low price, and manufacturers assessing whether to follow Procter & Gamble's lead and replace a policy of funding consumer price reductions through trade deals with a constant wholesale price.

A reference price is an anchoring level formed by customers based on the pricing environment. The literature suggests that demand for a brand depends not only on the brand price, but also whether the brand price is greater than the reference price a perceived loss or is less than it a perceived gain. The responses to gains and losses are asymmetric. Broadly speaking, we find that when enough consumers weigh gains more than losses, the optimal pricing policy is cyclical. Likewise, when they weigh losses more than gains, a constant price is optimal. Thus, we provide a rationale for dynamic pricing which is quite distinct from the three explanations previously offered: 1 decreasing unit variable costs due to learning effects, 2 the transfer of inventory to consumers who face lower inventory holding costs than do retailers, and 3 competitive effects. Our explanations apply even when the other explanations do not, i.e., in mature product categories where learning effects are minimal, when retailer inventories are minimized through the use of just-in-time policies and when competitive effects do not exist, as in a monopoly.

Greenleaf 1995 has shown numerically that in the presence of reference price effects, the optimal pricing policy for a monopolist can be cyclical. We first analytically extend Greenleaf's result to a monopolist with a constant cost of goods, facing a homogeneous market where all customers either weigh gains more than losses or vice versa. Using this building block we examine a monopolist retailer managing multiple brands. We assume that demand is a linear function of prices of multiple brands, and together with an expression which reflects the reference price effect. Further, we assume that the retailer maximizes average profit per period. Next, we analyze a duopoly and extend the results to an oligopoly. We assume that the manufacturers are able to set the retail prices, as in an integrated channel. Here, we retain the same demand function as for the retailer and derive Markov Perfect Nash equilibria. We use two alternative processes of reference price formation: the exponential smoothed ES past price process which is frequently used in the literature, and for the multi-brand situations, the recently proposed reference brand RB process Hardie, Johnson, and Fader 1993. In the latter, the reference price is the current price of the last brand bought---the reference brand. We adapt the individual level RB formulation in Hardie et al., to an aggregate demand specification. For the ES process, we obtain most results analytically; for the RB process we use simulation. Finally, we extend our results to a population with two customer segments: Segment 1 which weighs gains more than losses, and Segment 2 which does the opposite, i.e., is loss averse.

When the market consists exclusively of Segment 1 customers and ES is the reference price process, we find that prices are cyclical in all cases analyzed, i.e., for a monopoly, a monopolist retailer managing multiple brands, a duopoly, and an oligopoly. If the RB formulation is the underlying process, a monopolist retailer managing two brands uses cyclical prices, but in a duopoly, the equilibrium solution is for the brands to maintain constant prices. When all customers belong to Segment 2 i.e., they are loss averse constant prices are optimal in all cases for both reference price formulations. When the population consists of both Segment 1 and Segment 2 and the ES process applies, we develop a sufficient condition for cyclical pricing policies to be optimal. The condition is expressed in terms of the proportion of the two segment sizes, the absolute difference between the gain and loss parameters of each segment, and their respective exponential smoothing constants. Interestingly, for reasonable values of the latter two factors, cyclical policies are optimal even when the proportion of Segment 1 is quite small. Similar magnitudes are obtained numerically for the RB case.

Asymmetric Reference Price Effects and Dynamic Pricing Policies

Research on optimal bundling strategy has primarily dealt with the case of a monopolist and suggests that mixed bundling be adopted, as it allows for price discrimination. The overwhelming majority of consumer products, however, operate in a competitive arena, so that an adequate description of the bundling phenomenon needs to take account of alternative competitive product offerings. A few researchers have examined the duopolistic case — two suppliers each offering a bundle composed of two complementary products. However, the collective results do not paint a consistent picture. For example, Economides (1993. Mixed bundling in duopoly. Working Paper, Stern School of Business, New York University, EC-93-29) shows that the sub-game perfect Nash equilibrium bundling strategy is to offer a mixed bundle. By contrast, Anderson and Leruth (1993. Why firms may prefer not to price discriminate via mixed bundling. International Journal of Industrial Organization 11: 49-61), show that the solution is to offer pure components. The results of Matutes and Regibeau (1992. Compatibility and bundling of complementary goods in a duopoly. Journal of Industrial Economics 40: 37-54) suggest that the bundling strategy depends on consumer reservation price: mixed bundling when it is low and pure components when it is high. This paper offers an analytical analysis that reconciles these results by incorporating the moderating role of market expansion on equilibrium bundling strategies. Rendering comparable the conflicting results of such prior research requires selecting a methodology that not only sufficiently allows for their unique formal specifications, but which, in the current estimate, best captures empirical phenomena of broadest interest. The focus on market expansion suggests a model of the nested logit type (see Bucklin and Gupta 1992. Brand choice, purchase incidence, and segmentation: an integrated approach. Journal of Marketing Research 29: 201-215). It is shown that the sub-game perfect Nash equilibrium bundling strategy in a duopoly depends on the scope for market expansion, i.e., as the scope for market expansion decreases, the equilibrium bundling strategy shifts from mixed bundling to pure components. It is also shown that pure bundling will not be an equilibrium strategy. Finally, a discussion of the results when the assumption of perfect complementarity is relaxed is provided.

The Role of Market Expansion on Equilibrium Bundling Strategies

Research on optimal bundling strategy has primarily dealt with the case of a monopolist and suggests that mixed bundling be adopted, as it allows for price discrimination. The overwhelming majority of consumer products, however, operate in a competitive arena, so that an adequate description of the bundling phenomenon needs to take account of alternative competitive product offerings. A few researchers have examined the duopolistic case—two suppliers each offering a bundle composed of two complementary products. However, the collective results do not paint a consistent picture. For example, Economides (1993. Mixed bundling in duopoly. Working Paper, Stern School of Business, New York University, EC-93-29) shows that the sub-game perfect Nash equilibrium bundling strategy is to offer a mixed bundle. By contrast, Anderson and Leruth (1993. Why firms may prefer not to price discriminate via mixed bundling. International Journal of Industrial Organization11: 49–61), show that the solution is to offer pure components. The results of Matutes and Regibeau (1992. Compatibility and bundling of complementary goods in a duopoly. Journal of Industrial Economics40: 37–54) suggest that the bundling strategy depends on consumer reservation price: mixed bundling when it is low and pure components when it is high. This paper offers an analytical analysis that reconciles these results by incorporating the moderating role of market expansion on equilibrium bundling strategies. Rendering comparable the conflicting results of such prior research requires selecting a methodology that not only sufficiently allows for their unique formal specifications, but which, in the current estimate, best captures empirical phenomena of broadest interest. The focus on market expansion suggests a model of the nested logit type (see Bucklin and Gupta 1992. Brand choice, purchase incidence, and segmentation: an integrated approach. Journal of Marketing Research29: 201–215). It is shown that the sub-game perfect Nash equilibrium bundling strategy in a duopoly depends on the scope for market expansion, i.e., as the scope for market expansion decreases, the equilibrium bundling strategy shifts from mixed bundling to pure components. It is also shown that pure bundling will not be an equilibrium strategy. Finally, a discussion of the results when the assumption of perfect complementarity is relaxed is provided. Copyright © 1999 John Wiley & Sons, Ltd.

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The role of market expansion on equilibrium bundling strategies

We analyze why some firms advertise product quality at a level different from the actual quality of a product. By considering the interacting effects of product quality and advertising, we develop a dynamic model of consumer expectations about product quality and the development of brand goodwill to determine the optimal values for the decision variables. The model parameters are determined based on prior literature and we use numerical techniques to arrive at the solution. We then derive conditions under which a firm will find it optimal to overstate or understate product quality. The results suggest that quality may be overstated in markets characterized by high price sensitivity, low quality sensitivity, low brand loyalty, and high source credibility, suggesting the need for vigilance on the part of consumers, upper level managers and regulatory authorities in such market conditions. This is important because current regulatory resources are insufficient to reduce deceptive advertising practices (Davis JJ. 1994. Ethics in advertising decision-making: implications for reducing the incidence of deceptive advertising. Journal of Consumer Affairs28: 380–402). Further, the law of deceptive advertising prohibits some advertising claims on the ground that they are likely to harm consumers or competitors (Preston IL, Richards JI. 1993. A role for consumer belief in FTC and Lanham Act deceptive advertising cases. American Business Law Journal31: 1–29). Also, Nagler (1993. Rather bait than switch: deceptive advertising with bounded consumer rationality. Journal of Public Economics51: 359–378) shows that deceptive advertising causes a net social welfare loss and a public policy effectively preventing deception will improve social welfare. Copyright © 2000 John Wiley & Sons, Ltd.

João L. Assunção

Papers

Asymmetric Reference Price Effects and Dynamic Pricing Policies

The Role of Market Expansion on Equilibrium Bundling Strategies

The role of market expansion on equilibrium bundling strategies

When (not) to indulge in ‘puffery’: the role of consumer expectations and brand goodwill in determining advertised and actual product quality