Comparative Price Advertising: Believe It or Not

TLDR: Grewal et al. as mentioned in this paper examined the effect of the advertised reference price and the selling price on consumers' believability of the advertisement reference price as well as their perceptions of the value of the deal.

Abstract: Advertisers' attempts to enhance consumers' perceptions of the value of a deal by using comparative price advertisements, in which they implicitly or explicitly compare the selling price to some suggested reference price, is widespread. Rare is the price advertisement that only proclaims the selling or "sale" price. Although the additional information contained in an advertised reference price may be useful to consumers, a crucial issue concerns the deceptive power of comparative price advertising that provides inflated and exaggerated reference prices. Under these circumstances, it is possible for consumers to develop perceptions of the deal that are not based on actual savings. Such issues have been the focus of a number of lawsuits and have spurred research on what constitutes deception (see Grewal, Grewal, and Compeau 1993 for a description of relevant FTC guidelines and summary of major legal cases against popular retailers). In a comprehensive review of the literature, Grewal and Compeau (1999) examine critical public policy issues associated with pricing strategies. The authors stress that although many substantive conclusions can be drawn from the extant research, several gaps still exist. They also provide a conceptual framework to understand key issues, and emphasize the need for additional research to investigate whether firms can (intentionally or unintentionally) mislead consumers. This research focuses on one gap, the effects of the advertised reference price and the selling price on consumers' believability of the advertised reference price as well as their perceptions of the value of the deal. BACKGROUND Researchers have spent over two decades assessing the effectiveness of comparative price advertisements. The primary substantive issue centers on whether consumers are influenced by advertised references prices. Based on an integrative review of the literature, Compeau and Grewal (1998) conclude that the mere presence of a comparison price enhances consumers' internal reference prices and overall perceptions of value, reduces search intentions, but has no significant effect on purchase intention. However, the effect on believability was not assessed because of an insufficient number of studies that have addressed this issue. In general, including a reference price in an advertisement provides the consumer with a point of comparison by which to judge the lower selling price, thus providing a basis for a more favorable evaluation of the deal. Moreover, as the gap between the advertised reference price and the selling price (i.e., advertised savings) increases, perceptions of value will also increase. However, t his effect is thought to occur only so long as consumers believe that the advertised reference price has some validity. Empirical research (see Compeau and Grewal 1998, Urbany et al. 1988) supports the conclusion that reference prices, even when exaggerated, can enhance subsequent evaluations. In light of the potential harm that can come to consumers, it is important to further scrutinize the extent to which consumers believe advertisers' claims and how these claims influence consumers' evaluations of the offers. CONCEPTUAL FRAMEWORK Thaler (1985) suggests that a consumer's overall perception of the "value" of a purchase is not just the acquisition value (i.e., the value associated with possessing the product), but also includes an assessment of the "deal," i.e., the transaction value. Thaler suggests that transaction utility is the comparison between the reference price and the sale price. If the reference price is greater than the sale price, the transaction utility is positive. Thaler's (1985) transaction utility has been adapted for use in understanding comparative price advertising effects, and has been called transaction value--the pleasures associated with getting a good deal (Grewal, Monroe, and Krishnan 1998). …