Effect of Adjacent Product Price on Customer’s Willingness to Pay of Focal Brand: A Bayesian Approach

Abstract

Psychological researchers, while studying internal reference price, have dealt with different types of psychological effects like attraction effect and compromise effect. While studying consumer reference price and willingness to pay, marketing researchers have focused on consumers’ perception about a brand by evaluating several attributes of that brand. Our research investigates the incremental effect on consumers’ willingness to pay in a context where an adjacent price is present, for instance, when a medium priced brand is associated with a high price brand than a moderately high priced brand. Unlike other pricing research, this research deals with consumer’s individual level heterogeneity as price sensitivity and consumers’ willingness to pay for a particular brand since they vary among individual. Hierarchical Bayes methodology is used to incorporate such heterogeneity. The study shows significant difference in consumers’ utility and her willingness to pay when a medium priced brand is compared with a high priced brand as against a moderately high priced brand.