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The Impact of the Perceived Variance of Price Sequences on Choice

The Impact of the Perceived Variance of Price Sequences on Choice. Eric Dolansky , Brock University Kyle Murray, University of Alberta Mark Vandenbosch , Ivey School of Business. Uncertain Outcomes.

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The Impact of the Perceived Variance of Price Sequences on Choice

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  1. The Impact of the Perceived Variance of Price Sequences on Choice Eric Dolansky, Brock University Kyle Murray, University of Alberta Mark Vandenbosch, Ivey School of Business

  2. Uncertain Outcomes • When there is uncertainty or ambiguity about an outcome, individuals tend to try to avoid risk and pay to do so • Example: fixed vs. floating interest rates • While pricing models include prices over time, they tend to smooth out variability • Existing pricing models do not incorporate the ability to make future price predictions Dolansky, Vandenbosch & Murray

  3. Price Sequences • Price sequence: a series of prices as observed over time by a consumer • Example: Gas prices • All of the individual prices over time: series • Those observed and remembered by a consumer: sequence • Price sequences are becoming more common and accessible, due to dynamic pricing and the internet Dolansky, Vandenbosch & Murray

  4. Theoretical Background • Uncertainty and Ambiguity • Reference price • Behavioral Pricing • Sequences of Events Dolansky, Vandenbosch & Murray

  5. Basic Procedure for all Studies • Experiment was set up as a business buying decision • Participants had to choose between two vendors of ‘transportation services’ • Information about transportation services was provided, e.g. fluctuating prices • Past price information was presented, one price at a time, 26 prices per vendor • Participants chose based on this information Dolansky, Vandenbosch & Murray

  6. Study One - Design Initial exploration of the price sequence • 2 (direction of trend) x 2 (order) design • All participants viewed the zero-slope sequence • The ascending and descending sequences were each viewed by half of the participants • Sequences were randomly generated from a set distribution; all have equal variances Dolansky, Vandenbosch & Murray

  7. Study One Price Sequences Dolansky, Vandenbosch & Murray

  8. Price E-mail Dolansky, Vandenbosch & Murray

  9. Choice Shares From Study One *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

  10. Study One Findings • The ascending sequence was preferred to the zero-slope sequence • The descending sequence was not • Non-zero slope sequence was a significant predictor of preference • There was a significant order effect Price sequences matter; people made sub-optimal choices based on the sequence Dolansky, Vandenbosch & Murray

  11. Study Two What do participants know and remember when making the decision? • Memory could have been an issue • Same basic design as study one • Before selecting a vendor, participants were asked to recall prices for one of the vendors • Prices were reported graphically and numerically (e.g. mean, maximum, etc.) • Variance was rated from 1 (low) to 7 (high) Dolansky, Vandenbosch & Murray

  12. Study Two Recall Results Zero-Slope Ascending Descending Actual Mean Response Actual Mean Response Actual Mean Response Mean (response) 8.10 7.82 4.86 6.05 11.14 9.85 Mean (graph) 8.10 8.02 4.86 6.18 11.14 10.47 Variance (response) N/A 6.09 N/A 4.56 N/A 3.76 Variance (graph) 7.57 6.96 7.57 6.99 7.57 7.41 Average Consecutive Difference (graph) 3.64 2.67 0.62 1.03 0.62 0.67 Slope (graph) 0.02 0.03 0.34 0.26 -0.34 -0.27 Ascending (response) 0 0.30 1 0.89 0 0.02 Descending (response) 0 0.11 0 0.09 1 0.93 Zero-Slope (response) 1 0.49 0 0.02 0 0.02 Dolansky, Vandenbosch & Murray

  13. Choice Shares From Studies One and Two *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

  14. Study Two Findings • Participant responses/graphs were generally accurate, apart from perceived variance • Study one was replicated; the recall task does not affect choice or preference • Variance ratings differed across sequences Participants could accurately recall the sequences, yet still made sub-optimal choices Dolansky, Vandenbosch & Murray

  15. Study Three Design What if the ending price drives the effect? • Replication of study one, with a different zero-slope sequence • Zero-slope sequence was inverted, so the new version ended on a low price • This was done to address concerns that recency was driving the choice shares Dolansky, Vandenbosch & Murray

  16. Study One Price Sequences Dolansky, Vandenbosch & Murray

  17. Study Three Price Sequences Dolansky, Vandenbosch & Murray

  18. Choice Shares From Studies One and Three *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

  19. Study Three Findings • Successful replication of study one • The ascending sequence was significantly preferred in comparison to the descending sequence • Order effect disappeared • The ascending sequence was still dominant The ending price had no effect on choice or preference Dolansky, Vandenbosch & Murray

  20. Study Four Design Is perceived variance truly driving the effect? • 2 (order) x 2 (equivalent peak vs. mean) x 2 (focal sequence) x 2 (prediction target) design • Participants chose between the a zero-slope sequence and an ascending sequence with the same mean/peak • Future price predictions were also elicited for either a focal sequence or the chosen sequence Dolansky, Vandenbosch & Murray

  21. Scale Items for Study Four • Factor: Variability • The price sequence was variable • The prices I saw varied • I could not see any consistency in the pricing • Factor: Predictability • Past prices were helpful in predicting the next price • It was possible to predict the next price before it was shown • Each new price made sense given past prices Dolansky, Vandenbosch & Murray

  22. Price Sequences for Study Four Dolansky, Vandenbosch & Murray

  23. Study Four Findings • Order effect disappeared • No difference between equivalent peak (32.3%) and mean (36.7%) conditions was found *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

  24. Study Four Findings, cont’d • Higher prices were predicted for the ascending sequence ($11.99) than for the zero-slope sequence ($8.66) • Ascending predictions had the 3rd price higher than the 1st; zero-slope predictions did not • No effect of whether the predictions were for the sequence chosen (p = 0.776) The ascending sequence is chosen even with a higher mean, and predictions for it are higher yet Dolansky, Vandenbosch & Murray

  25. Key Findings • Price sequences matter in choice • Perceived variability of a price sequence could be more important than the price itself • Perceived variance appears to be comprised of both predictability and variability • Even though participants expected a sequence to give prices that are 40% higher in the future, they still chose it • Uncertainty and ambiguity appear to play a large role in the decision-making Dolansky, Vandenbosch & Murray

  26. Wrap-Up Thank you for your time! Any questions? Dolansky, Vandenbosch & Murray

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