Background

In the realm of retailing, pricing plays a pivotal role, in influencing consumer behavior and their willingness to make purchases. With the advent of online marketplaces, there has been an increased interest in understanding the effects of different pricing strategies on consumer decision-making. One particular area of interest in pricing research is the reference point effect, which refers to how consumers perceive and evaluate prices relative to a reference point.

In previous studies, researchers have separately examined two common pricing cues: reserve prices (RP) and buy-it-now prices (BIN). Reserve prices are the minimum acceptable prices set by sellers in auctions, while buy-it-now prices offer consumers the opportunity to purchase items immediately at a fixed price. While these studies have provided valuable insights into the individual impact of RP and BIN, there remains a gap in understanding their combined effects.

The current study aims to address this gap by exploring the joint reference point effect of BIN and open RP. Open RP refers to the publicly displayed starting prices in auctions, which can serve as an initial reference point for bidders. By analyzing both BIN and open RP together, the researchers seek to discern whether these pricing cues have a collective impact on consumer behavior.

Furthermore, the study seeks to identify which of the two reference points – BIN or open RP – exerts a stronger influence on consumer decision-making. Understanding the relative strength of these pricing cues is crucial for sellers to effectively design their pricing strategies and attract more buyers.

Additionally, the study delves into the interaction between BIN and open RP. By examining how these two pricing cues interact and influence each other, the researchers aim to gain deeper insights into consumer perceptions and reactions to different pricing scenarios.

To achieve these objectives, the study employs a controlled field experiment on a local internet auction website. The researchers have carefully designed the experiment to ensure that they have complete control over the website's layout and content, minimizing the impact of confounding variables. This meticulous approach allows them to isolate the effects of BIN and open RP on consumer behavior.

The experimental design includes multiple conditions, each representing different combinations of BIN and open RP magnitudes. By varying these factors, the researchers can estimate the joint effect and interaction between the two pricing cues. This comprehensive approach results in 21 different conditions, allowing for a thorough investigation of the research questions.

Participants in the study are undergraduate business students who receive research credit for their participation. They are presented with eight different auctions, each featuring a different product and a specific pricing condition. The diverse set of products and conditions enables the researchers to capture variations in consumer perceptions and behaviors across different contexts.

Through their meticulous analysis, the researchers find that both BIN and open RP have significant impacts on consumer behavior and willingness to pay. The presence of a BIN increases the number of bidders, the final price of the item, and the likelihood of a successful sale. Similarly, the presence of an open RP also increases the final price and the probability of a sale, albeit without a significant effect on the number of bidders. These findings highlight the importance of both BIN and open RP as influential pricing cues in consumer decision-making.

Moreover, the study reveals that the joint effect of BIN and open RP is significant, indicating that the combination of these pricing cues has a meaningful impact on consumer behavior. This underscores the importance of considering both BIN and open RP in pricing strategies to maximize revenue and optimize sales.

Furthermore, the researchers find that the reference point effect of BIN is stronger than that of open RP. This suggests that consumers are more influenced by the presence of a fixed price for immediate purchase than by the initial starting price in auctions. However, the positive interaction between BIN and open RP suggests that these pricing cues are not independent and can complement each other in influencing consumer perceptions.

In conclusion, the study provides valuable insights into the reference point effect of reserve and buy-it prices in the context of online retailing. By analyzing both pricing cues together, the researchers shed light on their joint impact, relative strength, and interaction. The findings have practical implications for sellers and online marketplaces, emphasizing the significance of using both BIN and open RP to optimize pricing strategies and enhance consumer experiences. Overall, the study contributes to a deeper understanding of consumer decision-making in online retail environments and offers valuable guidance for sellers seeking to maximize revenue and attract more buyers.

Experimental Design

The study was conducted as a controlled field experiment run on a local internet auction website in a major North American metropolitan area from October 31 to November 8, 2009. Throughout the study, the researchers had complete control over both the layout and content of the website, allowing them to control for confounding variables such as competing auctions with different BINs and/or open RPs. At the time of the study, the auction site had more than 9,000 registered users. All the experimental products were featured on the main page of the auction website, and no identical items were sold by other sellers on this site.

The study employed five BIN magnitudes (25%, 50%, 100%, 150%, and 200% of the retail value), the same five open RP magnitudes, a control condition with no BIN and no RP, and ten conditions with both an open RP and BIN present, allowing the researchers to estimate the joint effect (where the open RP value is at about 35% and 70% of the BIN value). This approach resulted in 21 different conditions.

Participants

The study was conducted in a research lab at a major North American university between October 15–25, 2010. Participants were 156 undergraduate business students who received research credit for their participation. The participants answered questions about eight different auctions, each for a different product and a different condition. The eight products varied in terms of product value and ease of value assessment (both aspects may influence a potential reference point).

Results

The results of the study showed that both BIN and open RP have a significant impact on consumer behavior and willingness to pay. The presence of a BIN increased the number of bidders, the final price, and the probability of a sale. The presence of an open RP also increased the final price and the probability of a sale, but it had no significant effect on the number of bidders. The joint effect of BIN and open RP was found to be significant, and the interaction between the two was positive.

The study also found that the reference point effect of BIN was stronger than that of open RP. Specifically, the presence of a BIN had a larger impact on the final price and the probability of a sale than the presence of an open RP. However, the interaction between BIN and open RP was positive, indicating that the two pricing cues are substitutes.

Practical Implications

The results of this study have several practical implications for retailers and online marketplaces. First, the presence of a BIN can increase the number of bidders, the final price, and the probability of a sale. Therefore, sellers should consider using BINs to attract more buyers and increase their revenue. Second, the presence of an open RP can also increase the final price and the probability of a sale, but it may not attract more bidders. Therefore, sellers should consider using open RPs to increase their revenue and improve their profitability. Third, the joint effect of BIN and open RP is significant, and sellers should consider using both pricing cues to maximize their revenue. Finally, the study provides valuable insights into the reference point effect of pricing cues, and sellers should consider using reference cues to influence consumers' willingness to pay.

Conclusion

In conclusion, this study presents important findings regarding the reference point effect of reserve and buy-it-now (BIN) prices in the retailing context. The research demonstrates that both BIN and open reserve prices (RP) play a crucial role in influencing consumer behavior and their willingness to pay for products. Moreover, the combined impact of BIN and open RP on consumer decision-making is positive, indicating that the presence of both pricing cues enhances their effectiveness.

The study's results highlight the significance of considering both BIN and open RP as part of a retailer's pricing strategy. The presence of a BIN, which offers consumers the option to purchase immediately at a fixed price, positively influences consumer behavior in several ways. Firstly, it increases the number of bidders, attracting more potential buyers to engage with the product. Secondly, it leads to higher final prices for the products, as consumers perceive the fixed price as a convenient and attractive option. Lastly, the probability of a successful sale also rises when a BIN is available, as it appeals to consumers seeking immediate gratification.

Similarly, the presence of an open RP, which sets the initial starting price for auctioned items, also plays a significant role in shaping consumer behavior. While it does not influence the number of bidders, it positively impacts the final price and the likelihood of a sale. Consumers consider the open RP as a point of reference when evaluating the product's value and determining their willingness to bid.

One crucial finding is the interaction between BIN and open RP. The study reveals that these pricing cues are not competing but rather act as substitutes in influencing consumer behavior. This implies that sellers have the flexibility to choose either BIN or open RP, depending on their specific goals and the product's characteristics. Both pricing cues offer distinct advantages, and their combination can provide a more comprehensive approach to attracting buyers and optimizing revenue.

Furthermore, the research identifies that the reference point effect of BIN is stronger than that of open RP. This means that the presence of a fixed BIN price has a more pronounced impact on consumer behavior compared to the starting open RP value. The BIN serves as a clear and concrete reference point for consumers, guiding their perceptions of value and influencing their decision-making process.

The practical implications of these findings are substantial for retailers and sellers operating in online marketplaces. Firstly, incorporating both BIN and open RP in pricing strategies can lead to improved revenue generation. The presence of a BIN attracts more bidders, increasing competition and driving up the final price. Simultaneously, using an open RP can also enhance the final price, making auctions more competitive and profitable.

Secondly, the study underscores the importance of understanding consumer psychology and reference points in pricing decisions. By recognizing the reference point effect of BIN and open RP, sellers can better align their pricing with consumer expectations and preferences. This alignment can lead to improved customer satisfaction and increased repeat purchases.

In conclusion, this study sheds light on the reference point effect of reserve and buy-it-now prices in retailing, providing valuable insights for sellers seeking to optimize their pricing strategies. Both BIN and open RP have significant impacts on consumer behavior, with their combined presence yielding positive results. While BIN serves as a stronger reference point, it does not diminish the value of using an open RP, as the two cues can work together to influence consumers effectively. Retailers can leverage these findings to develop pricing strategies that attract more buyers, increase revenue, and ultimately improve their profitability in the competitive landscape of online marketplaces.