Consumer Price and Promotion Expectations: An Experimental Study

Abstract

The authors report results from a controlled experiment designed to investigate the impact of a brand's price promotion frequency and the depth of promotional price discounts on the price consumers expect to pay for that brand. A key feature of the work is that expected prices elicited directly from respondents in the experiment are used in the analysis, as opposed to the latent or surrogate measures of expected prices used in previous studies. As hypothesized, both the promotion frequency and the depth of price discounts are found to have a significant impact on price expectations. Evidence also supports a region of relative price insensitivity around the expected price, such that only price changes outside that region have a significant impact on consumer brand choice. Further, the authors find that consumer expectations of both price and promotional activities should be considered in explaining consumer brand choice behavior. Specifically, the presence of a promotional deal when one is not expected or the absence of a promotional deal when one is expected may have a significant impact on consumer brand choice. Finally, as in the case of price expectations, consumer response to promotion expectations is found to be asymmetric in that losses loom larger than gains.