chapter  13
28 Pages

Psychology of pricing: A review and suggestions

ByH. G. Parsa, David Njite

Price is one of the important variables used by consumers in making purchase decisions. According to Kotler et al. (1999, p. 401), price is the only revenue-generating element in the four Ps (i.e., product, price, place, and promotion) of marketing mix. When calculating maximum utility of a product prior to a purchase decision, according to Monroe (1990, p. 46), consumers use product price and non-monetary sacrifices as the denominator and quality of goods and service as the numerator. By assessing product utility in this manner, consumers are able to effectively use monetary and non-monetary factors in deriving the final value of a product. From an economics point of view, price is explained as a function of

the interplay between demand and supply. The microeconomic theory of demand and supply describes and predicts price and quantity of goods and services sold in a perfectly competitive market, examining demand in terms of the customer and supply from a seller perspective. This can be graphically presented as in Figure 13.1. The supply and demand model in Figure 13.1 describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S). A great deal of economics theory on pricing is based on various

assumptions. One assumption relates to the questions such as: what is the effect of altering price on sales volume? If the price is reduced, will the increase in sales volumes make up for the price reduction? Will a price increase lead to a reduction in demand? Will the extra dollars generated cover for the loss of sales volume? But this kind of

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economics-based analytical approach to understanding pricing makes various assumptions about the consumer as well. The most obvious assumption is the notion that consumers make

rational decisions of utility maximization while making product purchases (Narasimhan, 1984). Thus, consumers keep rationalizing choices and the amount to buy in order to maximize utility. This classical economics theory assumes that consumers will only spend money on products that will give them the most happiness at the least cost. Thus, in general, price and demand will have an inverse relationship. Unfortunately, extant literature (literature in psychological pricing and conspicuous consumption in particular) shows that this is not necessarily true in all instances. Consumer purchase is more complex than depicted by the economics

theory. Thus, there are situations where consumers buy more as price increases. For example, literature identifies at least three kinds of consumption patterns that do not quite fit into the framework of traditional supply and demand. Some of them may include the snob effect where consumers want to distinguish themselves from other consumers (consume niche products) and the bandwagon effect where consumers want to be in the crowd and buy what everyone else is buying. The Veblen effect is another case in which consumers buy conspicuous goods that display a sense of belonging to the upper classes. According to these three effects, the traditional laws of supply and demand do not apply for some consumer products such as fashionable destinations, fancy restaurants, luxury cars, and any product that is priced at a high level not because of its high utility value but because of its affect value in the eyes of its consumers. The concept of psychological pricing remains of interest and impor-

tance to both practitioners and academic researchers alike. This interest and importance is depicted by the continually emerging streams of literature and research related to psychological pricing. Generally, psychological pricing has been studied from many perspectives, the diversity of this examination matching that of the researchers involved. For example, papers published in the marketing literature have examined psychological price from both individual and household level models of reference price (Janiszewski and Lichtenstein, 1999; Krishnamurthi et al., 1992; Lattin and Bucklin, 1989). Other studies have examined psychological price from a framing perspective (e.g., Grewal et al., 1996; Naipaul and Parsa, 2001; Schindler, 1992; Thaler, 1985). The list is definitely unending. Even more recently, studies in psychological pricing have taken on a more interesting dimension by extending and examining pricing even further to include consumer psychology and culture. Simmons and Schindler (2002) and Hu et al. (2006) have examined the influence of consumers’ cultural beliefs on pricing and price presentation.