The Effect of Reference Price and Loss Aversion on Consumer Brand Choice, Category Purchase and Quantity Decisions

In this study I investigate the effects of reference price on three consumer purchase decisions: consumer brand choice, purchase incidence, and purchase quantity. First, I compare the impact of internal reference price (IRP) and external reference price (ERP) on the three consumer purchase decisions. I hypothesize that (a) consumers rely more on ERP (vs. IRP) in brand choice and purchase quantity decisions, and more on IRP (vs. ERP) in purchase incidence decision; and (b) consumers use both IRP and ERP simultaneously to evaluate shelf price in all three consumer purchase decisions. Second, I examine the impact of consumers’ loss aversion tendencies on the three consumer purchase decisions. I hypothesize that loss aversion affects all three consumer purchase decisions; that is, consumers respond more sensitively to a loss than to a corresponding gain. I estimate models of brand choice, purchase incidence and purchase quantity using multinomial logistic regression, binary logistic regression, and Poisson regression, respectively. \nHypotheses are generally supported based on empirical analyses of scanner data for a battery product category. This study contributes to the literature in two ways. First, it is the first study to test the direct impact of reference price on purchase incidence decisions. Second, it is the first study to incorporate both IRP and ERP variables into purchase incidence and purchase quantity decisions. Overall, this study contributes an understanding of the influence of reference price on three consumer purchase decisions, which provides both manufactures and retailers with valuable knowledge to formulate optimal pricing and promotion strategies.