Do Consumers Really Know if the Price Is Right? Direct Measures of Reference Price and Their Implications For Retailing

authors thank the HEC Foundation for its financial support, and Shantanu Sutta and Gilles Laurent for their comments on a previous draft. 2 Abstract Reference price research suggests that consumers memorize and recall price information when selecting brands for frequently purchased products. In this study, we show that previous price-knowledge surveys provided imperfect estimates of reference price. Further, we propose to use a combination of price recall, price recognition, and deal recognition to measure the degree to which consumers use auditory verbal, visual Arabic, or analogue magnitude representations to memorize prices. In addition we identify consumer and product characteristics that explain the variations in price knowledge. 3 There exists a large body of empirical evidence showing that, when making brand choices for packaged consumer goods, consumers compare observed prices to so-called reference prices they supposedly have in memory (cf., Winer 1986, or Kalyanaram and Winer 1995 for a review). Different models of reference price have been validated in the past and, in a comparison of the most common model formulations, Briesch et al. (1997) found that the best performing model is one that includes brand-specific reference prices, represented as a moving average of the price history of each brand in a category. This suggests that consumers store brand-specific price information in long-term memory, and update this information after each purchase occasion. The evidence for the existence of memory-based reference prices is nevertheless indirect. Choice models based on panel data indicate that in their brand selection, consumers act as if they have access to and use this type of information, but in reality, reference price knowledge is not measured directly. Reference price models imply that (1) consumers notice current prices, (2) they access the reference price in long-term memory, and (3) they process both prices at a sufficient level to allow comparisons. These assumptions are put into question by direct surveys of price knowledge. Whereas reference price studies based on panel data infer the use of reference prices without ever measuring their existence, another stream of research has focused specifically on measuring the level of price knowledge among consumers. Studies that directly measure price knowledge 1993) show that a surprisingly low percentage of consumers pay attention to prices, even while shopping. The numbers reported are low especially compared to what reference price research suggests (see Monroe and Lee 1999 for a comparison). Only 47 to 55% of the respondents can accurately …