The effects of reference prices on bidding behavior in interactive pricing mechanisms

Abstract

We examine the effect of reference prices on consumer bidding behavior in interactive pricing mechanisms used in online retailing, e.g., auctions and name-your-own-price. We find significant influences of different reference price concepts on bid values. However, after controlling for internal and external reference prices, sellers only have a moderate ability to affect bid values via the provision of an advertised reference price. An exaggerated advertised reference price increases the bid value among consumers who consider it to be believable. However, its effect is reversed in the presence of an external reference price if consumers consider it unbelievable, decreasing bid values.

Name-Your-Own-Price seller’s information revelation strategy with the presence of list-price channel

“…Besides the bid value submitted by consumers, the number of auction participants is another important factor for NYOP seller's revenue. Contrary to traditional list price format, Kamins et al (2004) and Wolk and Spann (2008) both show that the presence of a seller-supplied reference price significantly decrease the number of participants in an eBay style auction or the purchase intention in an NYOP style auction, respectively. It is believed that people with lower valuation no longer expect to win and will drop from the auction due to lower expected consumer surplus (Wolk and Spann 2008).…”

“…Contrary to traditional list price format, Kamins et al (2004) and Wolk and Spann (2008) both show that the presence of a seller-supplied reference price significantly decrease the number of participants in an eBay style auction or the purchase intention in an NYOP style auction, respectively. It is believed that people with lower valuation no longer expect to win and will drop from the auction due to lower expected consumer surplus (Wolk and Spann 2008). Although Wolk and Spann (2008) found limited influence of seller-advertising reference prices, they also recognized that different forms of providing reference prices to bidders could help NYOP sellers to positively influence consumers.…”

“…Although easiness of decision is a major concern for potential customers, we believe that the appeal of NYOP channel ultimately depends on the economic incentive when compared to list price channel. Extant literature is not consistent, however, on the economic effects of seller-supplied reference price in an auction: significant positive correlation between reference price and valuation/bids is reported by Kamins et al(2004) under eBay style auction, Wolk and Spann (2008) find only limited influence on bidders' value in an interactive NYOP auction. In addition, they find such effects are moderated by the believability of seller-supplied reference price.…”

“…It is believed that people with lower valuation no longer expect to win and will drop from the auction due to lower expected consumer surplus (Wolk and Spann 2008). Although Wolk and Spann (2008) found limited influence of seller-advertising reference prices, they also recognized that different forms of providing reference prices to bidders could help NYOP sellers to positively influence consumers.…”

How social comparison influences reference price formation in a service context

“…Kahneman and Tversky (1979) transferred the concept of reference dependence from psychology to behavioral economics, explaining that people frame outcomes as gains or losses relative to relevant reference points. The relevant literature examines the effect of reference points in the price domain, that is, on reference prices (Briesch et al, 1997;Mazumdar et al, 2005), and the topic relates to research on new pricing mechanisms, such as bidding behavior (Wolk & Spann, 2008) and pay-what-you want pricing (Johnson & Cui, 2013).…”