EXPERIMENT

We employ decision scenarios consistent with Thaler (1985), Chatterjee et al. (2000) and Heath et al. (1995) which investigated framing effect in multiple events. While our control questions are based on Thaler’s (1985) original approach in which reference states/points were omitted, we explicitly incorporate external reference prices as reference points into our treatment questions.

We adopt the ‘couch and chair’ purchase scenarios from experiment 1 in chapter four which shows two hypothetical men faced with decision frames involving financially equivalent situations and have to make a choice between purchasing only a chair or a chair and a couch together.

As it relates to the prevailing MAPs, the purchase of the couch alone represents a single outcome indicating the MAP of integration while the purchase of the chair and couch represents two outcomes indicating segregation.

Subjects were asked to indicate on a scale of 1-15 which of two men in hypothetical decision scenarios would be relatively happier (Gains) or unhappier (Losses). The mean of the scales (1-15) ‘8’ was taken as the indicator of indifference for combinations of outcomes. Means below 8 suggest the MAP of integration and means above 8 indicate segregation. In addition, in the gains outcomes, higher numbers indicated by the subjects on the scale, shows the levels of relative happiness of either Mr. A who bought an item or Mr. B who bought two items; and in the losses domains, higher numbers show the levels of relative unhappiness of either Mr. A who bought one item or Mr. B who bought two. In carrying out this experiment, we ignored the effects of psychological processes such as price certainty and uncertainty, affective reactions to price change; situational factors such as the specific brand in which changes in prices occur, and information in the market place; and individual differences such as product preferences, and level of cognition.

89 5.7.1 Measures

Subjects were given booklets containing 8 scenarios. The first four scenarios described the gains outcome while the last four presented the losses outcome. The control condition was the first of each set of four scenarios. Participants were asked to evaluate each scenario on a 15-point scale as follows:

Scale of 1 to 7 – Mr. A is happier than Mr. B (with 7 being highest level of happiness). Scale of 1 to 7 – Mr. A is unhappier than Mr. B (with 7 being highest level of unhappiness).

At midpoint 8 – Mr. A and Mr. B are equally happy. At midpoint 8 – Mr. A and Mr. B are equally unhappy.

Scale of 9 to 15 – Mr. B is happier than Mr. A (with 15 being highest level of happiness). Scale of 9 to 15 – Mr. B is unhappier than Mr. A (with 15 being highest level of unhappiness).

Decision scenarios from our questionnaires to illustrate competitor’s current prices and price presentation across the 3 frames are shown below. Scenario A shows price change in absolute terms, B shows price change using the dual frame, and C utilizes only the relative frame. All decision scenarios used in our experiments are presented in detail in Appendixes 2 and 3.

Scenario A (Absolute frame)

Mr. A wishes to buy a couch, Mr. B wishes to buy a couch and a chair. At the store, Mr. A finds that the price of the £1300 couch he set out to buy has been reduced to £1250; a competitor’s couch of the same quality and within the same store is priced at £1250. Mr. B finds that the prices of the £200 chair and £1100 couch he set out to buy have been reduced to £100 and increased to £1150 respectively. A competitor’s chair and couch of the same quality and within the same store goes for £100 and £1150 respectively.

Scenario B (Dual frame)

Mr. A wishes to buy a couch, Mr. B wishes to buy a couch and a chair. At the store, Mr. A finds that the price of the £1300 couch he set out to buy has been reduced by 4% to £1250; a competitor’s couch of the same quality and within the same store is priced at £1250. Mr. B finds that the prices of the £200 chair and £1100 couch he set out to buy have been reduced by 50% to £100 and increased by 5% to £1150 respectively. A competitor’s chair and couch of the same quality and within the same store goes for £100 and £1150 respectively.

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Scenario C (Relative frame)

Mr. A wishes to buy a couch, Mr. B wishes to buy a couch and a chair. At the store, Mr. A finds that the price of the £1300 couch he set out to buy has been reduced by 4%; a competitor’s couch of the same quality and within the same store is priced at £1250. Mr. B finds that the prices of the £200 chair and £1100 couch he set out to buy have been reduced by 50% and increased by 5% respectively. A competitor’s chair and couch of the same quality and within the same store goes for £100 and £1150 respectively.

5.7.2 Assumptions

We did not conduct any test on ambiguity as further information was not required from respondents in answering the survey. A few made notes on the questionnaires but these are negligible and no useful information could be extrapolated from these.

5.7.3 Design of experiment 1

We carry out four experimental conditions in a repeated-measures design based on outcome type varied across three price frames and with a competitor's current prices as the reference point.

Respondents were post graduate Economics students in the Adam Smith Business School of the University of Glasgow, United Kingdom. There were 247 respondents in total, and 71 of them were randomly assigned to the four experimental conditions. Thirty-three subjects were randomly assigned to two levels of the dependent variable (mixed gains and mixed losses outcome types) and thirty-eight were assigned to the other two levels (multiple gains and multiple losses).

Each respondent is assigned to two treatment levels which represent decision scenarios with explicitly stated reference points and percentage-based price frames; one control level based on Thaler’s (1985) original experiments which do not have clearly stated lacking reference points, and an absolute frame in which prices are stated in currency denominated units only and with the reference state clearly stated. The experiments were designed such that the same respondent assigned to the control and treatment levels in the mixed gains domains, was also assigned to that in the mixed losses domain but not to the other two outcome types. This in effect implies that one group of respondents had questionnaires evaluating mixed outcomes and another group, multiple outcomes. Overall values of changes in prices across all outcomes and treatment levels are presented in table 5.1.

91 Table 5.1 (Competitor’s current prices)

Amount of price change across frame and outcome type

OUTCOME FRAME

VALUE Absolute Percentage Mixed Gains: Control

Absolute Dual Relative £50 £50 £50 ─ ─ ─ 4% 4% Mixed Losses: Control

Absolute Dual Relative £15020 £50 £50 ─ ─ ─ 4% 4% Multiple Gains: Control

Absolute Dual Relative £100 £100 £100 ─ ─ ─ 8% 8% Multiple Losses: Control

Absolute Dual Relative £100 £100 £100 ─ ─ ─ 8% 8%