Reference Price Formation for Product Innovations – the Role of Consistent Price-Value-Relationships

Abstract

When deciding between product alternatives, consumers have to compare the observed prices to their internal reference price to determine whether the offer is a good deal or not. For product innovations, for which no reference price has been established, it is unclear against which standard the observed price is compared. Despite extensive research on the use of reference prices, little attention has been devoted to the formation of an internal reference price for an unfamiliar product category. We suggest two mechanisms of how reference prices are constructed and find support for these in two experiments. Reference prices for an unfamiliar product category can either be formed through repeated exposure to incidental price information or through transfer of price information from a familiar, similar product category to an unfamiliar product category. Crucial is however that the product price-value relationship is consistent; a condition often not accounted for in product innovation testing.