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Abstract
Examines the underlying process by which consumers form and use internal reference prices to determine the values of product offerings. Using four commonly-used measures of reference price, proposes and tests two alternative information-processing strategies. Also investigates consumers' latitudes of acceptance and rejection in forming internal reference prices. Specifically, examines whether and how consumers combine the upper and lower limits of their perceptions of multiple internal reference prices. For each of the proposed information-processing strategies, focusses on the "mental arithmetic" that consumers employ in combining the upper and lower limits of their acceptable price ranges to form internal reference prices. Suggests that: consumers do not combine the multiple reference points to form a single, well-defined internal reference price; consumers' use of reference prices varies according to the product category; and consumers do not always combine the information contained in the upper and lower limits of their price perceptions. Managerially, suggests that communication strategies which focus on price should vary across products and focus on different types of internal reference price.
Introduction
Most researchers agree that consumers respond to retail prices relative to some internal standard, commonly called internal reference price (IRP). Arguing for the inclusion of a reference-- price term in models predicting consumers' choices, Winer showed empirically that "[such models] predict probability of purchase better than do standard demand models that utilize only current observed brand prices" (1986, p. 250). Rajendran and Tellis also note that "empirical results generally support the inclusion of reference price in logit models of choice" (1994, p. 23). In spite of this general agreement, however, reference price research has been plagued by the lack of a universally accepted definition of internal reference price.
This article argues that a correct operationalization of IRP depends on the precise manner in which consumers process price-related information. Furthermore, drawing on the psychophysics literature, we conduct tests to see if consumers' IRPs are driven by:
* the upper limits of their price perceptions;
* the lower limits of their price perceptions; or
* some combination of the upper and lower limits.
Finally, we examine two consumer durables to determine whether consumers' utilization of IRP varies by product category.
Literature review
There is considerable disagreement among researchers regarding how internal reference price...