Modeling Gift Choice: The Effect of Uncertainty on Price Sensitivity

Gift giving generates high revenues for retailers. It is also marked with significant welfare, or deadweight, loss in that givers tend to pay more than the receivers’ valuation. Previous research has attributed this discrepancy to givers’ inaccurate predictions of the receivers’ preferences. This research demonstrates that reduced price sensitivity is another important source of the deadweight loss: givers use gift prices to signal the importance of their relationship with the receiver. In order to demonstrate this mechanism, the authors develop a new Bayesian gift-choice model that captures both preference predictions as well as the signaling value of price. The model is estimated on two choice-based conjoint studies for gift giving that allow for the manipulation of the giver's uncertainty about the receiver's preferences. Both studies show the strong signaling value of price, especially when givers are uncertain about receivers’ preferences. Decomposition of the deadweight loss shows that the signaling value of price is an important source of welfare loss, especially in markets with heterogeneous prices. These findings have key implications for the gift industry.