The Effect of the Reference Price on Consumer Decision: A Natural Field Experiment Antonio Filippin University of Milan Daniela Grieco Bocconi University

Research question and motivation Does Standard Consumer Theory (reservation price p’ > price actually paid p) succeed in predicting consumers’ purchases? Thaler (1985)’s concept of Transaction Utility based on the Reference Price (p*) Role of the Reference Price

Definition and determinants of the Reference Price Latent construct, representing a standard the purchasing price is compared to. IRP (Internal: consumer’s anchoring point) vs. ARP (Advertised: directly provided by the retailer) Sellers can only affect ARP Role of promotion signals

Method Natural experiment in the field  consumers take their decisions in their “natural” environment 7 points of purchase of a local chain store (almost a monopolist in the selected area) with a centralized management. Description of the points of purchase: located in the outskirt of a town, with a hard discount nearby. 2 subgroups (big vs. medium) homogeneous in size, sales volume and pattern.

Testable implications of consumer behavior Exogenously shock the internal reference price (IRP) in different ways. 3 treatments when price is discounted: - no ARP (only the lowered price, no signal) - mixed (only the lowered price + signal) - explicit ARP (both old and lowered prices + signal) 2 treatments when price is not discounted: - control (price displayed in the usual way) - Pavlov (price displayed on the shelf tag used for promotion)  Which manipulation has the larger effect on sales?

noARP

expARP

mixed

Pavlov

Experimental design I 3 variables are manipulated: Selling price (baseline vs. 25% discounted) Price display (only the selling price vs. both baseline and discounted) Promotion signal

Experimental design II

Criteria to select products With at least one close substitute (but not too many) Frequently purchased and characterized by a standard quality (i.e. quality is known and not inferred from the selling price. We want to rule out that a change in the reservation price could be a confounding factor) Not subject to promotions (if possible…)

List of products and distribution of treatments

Regression of sales on key variables

Results I ExpARP treatment significant for 2 out of 6 products Mixed treatment never significant! Pavlov treatment significant for 2 out of 6 products

Results II

Results III

Usual promotional means Central track Leaflets

Conclusions Weak reaction to indirect IRP manipulations The promotion signal seems to be more effective than comparison to the previous price Are consumers addicted by massive leaflets promotions? Are consumers too influenced by products position?