07
Nov
18

A Reference-Dependent Model of the Price–Quality Heuristic

Ayelet GneezyUri Gneezy, and Dominique Olié Lauga*

People often use price as a proxy for quality, resulting in a positive correlation between prices and product liking, known as the “price– quality” (P–Q) heuristic. Using data from three experiments conducted at a winery, this article offers a more complex and complete reference-dependent model of the relationship between price and quality. The authors propose that higher prices set higher expectations, which serve as reference points. When expectations are met or exceeded, we observe the familiar P–Q relationship. However, when price is high and quality is relatively low, the product falls short of consumers’ reference point and the P–Q relationship is reversed; thus, people evaluate a low-quality product with a high price more negatively than a low-quality product with a low price. Using the results of a field experiment, the authors discuss implications for pricing considerations and profitability.
http://journals.ama.org/doi/abs/10.1509/jmr.12.0407

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