INTERNAL REFERENCE PRICE AS A REFERENCE POINT

Based on the preceding discussion on price discounting, we draw from past research on price framing and the impact of frame on mental accounting principles. Previous studies in this area of research argue that the experiments from which Thaler’s (1985) MAPs were derived lacked explicitly stated reference points and that the inclusion of some form of reference could possibly alter some of these proposed principles.

As it relates to our present paper, these arguments suggest that the ways in which decision makers prefer to code their perceived monetary savings from price discounts could be dependent not just on mental accounting principles, but also from the context surrounding the decision frame. We specify context in terms of the price frames which show changes in prices as deviations from the consumer’s reference point.

The reference point considered in this chapter is internal reference price which we define as a retailer’s past prices observed in the store from the consumer’s most recent visit. This conceptualisation is based on Mazumdar et al. (2005) finding that the strongest determinants of a consumer‘s IRP are the prior prices observed or prices encountered on recent purchase occasions. We posit that both the discount sizes and/or the promotion signal subject to the reference point, would significantly affect MAPs since most decision makers will respond either to the number of times prices changed, or will only consider the size of

59 the discount. Consequently, we expect that percentage frames would enhance the perceptions of monetary savings and increase the tendency to segregate gains as well as minimize the disutility perceived from an increase in prices based on the premise that a price increase appears comparatively small when expressed in percentage. We therefore also propose that decision makers would also prefer to segregate multiple losses contrary to the prevailing MAP. This reasoning forms the three primary hypotheses investigated in this chapter.

𝐻₁: Percentage frames will reverse MAP for mixed gains and losses.

𝐻₂: Percentage frames will reinforce MAP for multiple gains and reverse multiple losses. 𝐻3: Comparison of a retailer’s current prices with a retailer’s past prices will affect the consumer’s perception of prices.

4.4.1 Experiment 1

To promote comparability with previous related research, we replicate the decision scenarios adopted by Chatterjee et al. (2000) and Heath et al. (1995) which evaluates framing effect in multiple events and is based on Thaler’s (1985) original approach. Where Thaler’s (1985) experiments are however lacking explicit reference points, the experiments by Chatterjee et al. (2000) and Heath et al. (1995) adopted the ‘couch and chair’ purchase scenarios 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 the two items 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 MAPs of integration and means above 8 indicate segregation. Furthermore, in the gains outcomes, higher numbers indicated by the subjects on the scale, show 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 items.

60 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, or information in the market place; and individual differences such as product preferences, or level of cognition. We however incorporate some level of memory for previously observed past prices into the questionnaires to indicate a degree of familiarity with the brand or patronage of that particular store.

4.4.2 Design of experiment 1

We carry out four experimental conditions in a repeated-measures design based on outcome type and with the retailer's past prices as the reference point. Although the between-subjects design permeates studies on framing effect, we use a within-subjects design to manipulate price frame. Our reasons for employing this design are: a) to take advantage of the elimination of the subject to subject variation associated with between- subjects experiments, b) to adequately detect an effect of our independent variable, and c) to highlight the generalizability of our results to real life situations.

We also utilize the differences between the means as a medium of analysis across each frame and evaluate how these relate to each other. A major concern however was the possibility that respondents would remember their previous choices and not deviate from them, thereby making their responses consistent across most frames. This would result in the reduction of any framing effect observed.

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 93 of them were randomly assigned to the four experimental conditions. Forty-eight subjects were randomly assigned to two levels of the dependent variable (mixed gains and mixed losses outcome types) and thirty-five were assigned to the other two levels (multiple gains and multiple losses).

Each respondent is assigned to three treatment levels which represent decision scenarios with explicitly stated reference points and one control level based on Thaler’s (1985) original experiments which have been described as lacking reference points. 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

61 outcomes. The 3 levels of the independent variable are absolute, relative and dual. The absolute frame presents the price change in absolute monetary terms. The relative frame describes the price change in percentage terms and omits the final price (after applying the change in price), while the dual frame indicates both the percentage discount and the final discounted price. Overall values of changes in prices across all outcomes and treatment levels are presented in table 4.2.

Table 4.2

Value of price change across frame and outcome type

OUTCOME FRAME

VALUE