Marketing Decisions with Reference Price Effect

Marketing Decisions with Reference Price Effect

Juzhi Zhang (University of Science and Technology of China, P.R. China), Erfeng Zhou (University of Science and Technology of China, P.R. China), Qinglong Gou (University of Science and Technology of China, P.R. China) and Susan Li (Adelphi University, USA)
Copyright: © 2014 |Pages: 10
DOI: 10.4018/978-1-4666-5202-6.ch133
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Abstract

Empirical research shows that there is a reference price existing in a consumer mind, which greatly affects the consumer's purchase decisions. However, what its impact is on a firm's advertising and pricing decisions has not been investigated. In this chapter we introduce a joint advertising and pricing model for a manufacturer-retailer supply chain, proposing an analytical framework to investigate the reference price's influence on these decisions. In detail, we assume that the reference price is affected by the brand advertising and retail price simultaneously and model its change in a differential equation. The manufacturer and retailer aim to maximize the present value of their profits. The way to solve this problem and future possible research on this issue are also suggested.
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Background

Reference price is defined as a standard against which the purchase price of a product is judged (Kalyanaram & Winer, 1995). The effects of reference price on consumer choice have long been recognized, and a large number of researchers from marketing and operations management have devoted themselves to this topic for decades. There is still, however, much worth studying. Studies exploring reference price effect can be found in both experimental and analytical modeling literature.

Key Terms in this Chapter

Advertising: A marketing activity that is used to make a product known and encourage or persuade consumers to buy.

Analytical Model: Mathematical models that can describe a system by mathematical concepts and language.

Brand Awareness: Brand awareness is the extent to which a brand is known by potential consumers, and is correctly associated with a particular product.

Supply Chain: A system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Reference Price: Reference price is the price that consumers maintain in their minds to be reasonable for a certain type of product.

Reference Point: When people make decisions, they often compare the options in a choice set with existing reference levels, which are called reference points.

Differential Equation: A differential equation is an equation that involves the derivatives of a function as well as the function itself.

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